A Newbie Guide to Investing

(11-09-2020, 08:05 AM)weijian Wrote: Methods change but principles don't. Have we adopted the principles and evolve ourselves to be closer to our true temperament?

I Hope This Inspires You

If you are still investing exactly the same way you did ten years ago you aren’t growing. Challenge your convictions. Surround yourself with people who share your values but think differently. I run into a lot of investors still talking about the wins they had 15 years ago. Don’t spend the next ten years bragging about the returns you had 20 years ago. Keep learning and evolving.

https://microcapclub.com/2020/09/i-hope-...pires-you/

If it still works, I don't see why you need to change. Otherwise, fully agree with the sentiment 

(11-09-2020, 08:53 PM)Wildreamz Wrote:

(11-09-2020, 08:05 AM)weijian Wrote: Methods change but principles don't. Have we adopted the principles and evolve ourselves to be closer to our true temperament?

I Hope This Inspires You

If you are still investing exactly the same way you did ten years ago you aren’t growing. Challenge your convictions. Surround yourself with people who share your values but think differently. I run into a lot of investors still talking about the wins they had 15 years ago. Don’t spend the next ten years bragging about the returns you had 20 years ago. Keep learning and evolving.

https://microcapclub.com/2020/09/i-hope-...pires-you/

If it still works, I don't see why you need to change. Otherwise, fully agree with the sentiment 

Can't agree more - if returns are still good, why tinker for the sake of tinkering. If returns have been bad recently,be thoughtful about the edge in your process. If the edge is still there, just hang on - no approach works all the time, but the right approach works, on average, over the long run.

And the distinction between methods and principles can be vague. There were "value investors" in the dotcom that changed their method of valuation from liquidation value, then to earnings power, then earnings power + growth, then to franchise value, then finally to the price to eyeballs nonsense. That did not end well for them. They probably were arguing that their philosophy value investing did not change, but the methods to apply the principles had to change because the landscape had changed etc.

So I think it's important to be careful when considering changes to your approach. If one is led astray, what was initially conceived to be a change in methods could actually end up just being an excuse for following the herd.

Not sure change or not change is better.

For my investment journey, it's kind of keep learning, keep testing, refine/polish and then repeat the cycle again - focusing on pruning the weeds while tending a flower bed.

Methods/principles is like a chest of drawers with tools.

Each time, when a drawer is open, there are something new to learn.

Sometime, what I learn can be put into practice but most of the time, it's just not for me (too tough, too difficult, too time consuming).

Occasionally, there will be ah-ha moment that explains something that I couldn't figure out and naturally it becomes part of my experimentation.

In the end, I found out that there are not really one methods but multiple ways/tools to try out and gain from the investment world.  Different tools can be used/required to address a particular opportunities.  I have no doubt that if you only using one tools and focusing on polishing the same tools, the rewards could be tremendous.  In fact, I suspects that even the best market operator might had been using/testing multiple tools in their life, however, likely only one of the tool is most successful and most rewarding in terms of returns.  

Of course, given a chest of drawers, the question is really which one is the most rewarding and also emotionally satisfying too?

For me, value investing is definitely the one.
Unfortunately, I am still wondering why this make sense to my 10 baggers (Bestworld) but it does not make sense for my favorite stocks (Micro Mechanics)?

P.S. Bestworld was brought with good MOS.  Micro Mechanics was brought without MOS.


Stay home and stay safe, everyone.

Investing exposes our fears, biases and the need for affirmation. Through the learning of this discipline, it is imperative for the OPMI to leverage the skills we have learnt in investing onto other areas of our life.

Judgment Under Uncertainty

Making good investment decisions and making good health care decisions are not all that different.

When the pandemic first began, very little was known about Covid-19; when mRNA vaccines came out, we had very little experience with them; the data on infection rates, mortality, side effects, etc., have been ambiguous and potentially confusing.

It seems that the skill set required to successfully navigate each of these challenges is similar.

https://ritholtz.com/2022/03/judgment/

I believe David Merkel's experience of finding out "the next eleven years that value investing was overrated" is not uncommon for VBs (eg. I was one of those confused for some time)

When things are working, we don't need to change, that is common sense. But when things are not working, when do we know when we need to change (and what to change)? That is the difference between wisdom and knowledge.

And WB's got 99% of his current wealth after the age of 60. If we strive for longevity, maybe it is good to put that into perspective.

When I was a Boy…

Over the next ten years, I tore up the pavement, and would have been in the top percentile of mutual fund managers. And so I opened my own shop in 2010, to find for the next eleven years that value investing was overrated.

Even at the age of 61, I am still learning. I am not a boy, obviously, but I am still absorbing new ideas. To all who read me, be life-long learners. I am closer to the end to my life than my beginning, but invest! Take your opportunities to learn and capitalize on them!

https://alephblog.com/2022/04/04/when-i-was-a-boy-2/

Thanks WeiJian - for sharing what you learn.

Extracted the Eight rules for recording purposes:

1. Industries are under-analyzed, relative to the market on the whole, and relative to individual companies. Spend time trying to find good companies with strong balance sheets in industries with lousy pricing power, and cheap companies in good industries, where the trends are not fully discounted.
   
2. Purchase equities that are cheap relative to other names in the industry. Depending on the industry, this can mean low P/E, low P/B, low P/S, low P/CFO, low P/FCF, or low EV/EBITDA.
   
3. Stick with higher quality companies for a given industry.
   
4. Purchase companies appropriately sized to serve their market niches.
   
5. Analyze financial statements to avoid companies that misuse generally accepted accounting principles and overstate earnings.
   
6. Analyze the use of cash flow by management, to avoid companies that invest or buy back their stock when it dilutes value, and purchase those that enhance value through intelligent buybacks and investment.
   
7. Rebalance the portfolio whenever a stock gets more than 20% away from its target weight. Run a largely equal-weighted portfolio because it is genuinely difficult to tell what idea is the best. Keep about 30-40 names for diversification purposes.
   
8. Make changes to the portfolio 3-4 times per year. Evaluate the replacement candidates as a group against the current portfolio. New additions must be better than the median idea currently in the portfolio. Companies leaving the portfolio must be below the median idea currently in the portfolio.
   

I'm really glad that these 8 rules are rather simple and rules #1, #2, #3, #5 and #8 sync with my rules too.

Rule #8 was rather un-common but it's one that I spend the most time on. But, before that, just a quick sharing of my thinking process:

For me, I'm like to simplify things and especially in investment, I would simplify all my metrics to #2.  A lot of valuebuddies like to spend time in getting the metrics right. For me, I just need to get the metrics roughly right aka using simple arithmetic to get an estimation instead of dealing with more complex models.  To be fair, majority of my "value investment" counters was brought with these metrics but there are a few exceptionally (proven) grow stocks was brought with other rules with UNATTRACTIVE metrics.  This - I'm still thinking about why the exceptions. 

Well, I could imagine that these (proven) grow stocks was due to rules #2, #3 and #5.  A quality stocks which I discovered a little too late aka their values had already gone up and there are no more MOS.  Without MOS, there must be a very good reason to vest and rules #2, #3, #5 and especially #8 come into picture.  These rules deal with the growth potential instead of MOS.  

I love these 8 rules and especially rules #8 which I spent most of my time - toying with new vs existing counters.  Without rule #8, my stocks portfolio will remain unchanged - forever. 

Gratitude.

I am self-taught value investor learning mostly from online resources about 20 years ago. In those days, there was much less info online so I complemented it with books. 

For those looking to lean investing today, there are much more free online resources. I have actually compile the URLs to such resources in my blog arranging them in terms of 
a) learning levels - foundation to advance
b) investing skills - company analysis, valuation, risks

I also have some "advice" so that overall it took 3 different articles to complete them. 
It is too long to replicate the lists but I provide the link to the first article for those who want to have the easy way and not spent time hunting for the websites. 

Go to Baby Steps into the Investment Universe: Beginners: Part 1 of 3

How do I start getting knowledge in the stock market?

There are two dimensions when people ask about the stock market
a) the structure eg how is it regulated, who are the players, how are transactions executed and tracked etc
b) how to invest ie what to buy, how much to buy when to buy or sell

I presume retail investors are most interested in the latter.

There are several investing styles eg technical vs fundamental, quant vs discretionary, indexing vs stock-picking, etc

All successful investors focus on one particular style so you should do likewise.

Go to Investopedia and get an overview of the various options. Then select one path based on your interest, risk tolerance, and other demographics.

Thereafter get an in-depth knowledge of the chosen path.

There are lots of free online resources on the various investing styles. Different styles have their owns guidelines and if you don’t focus you may be confused if you try to learn all the various styles in the beginning.

So chose one. If you want a shortcut to helping you choose, search “baby steps into the investment universe part 1” https://www.i4value.asia/2020/09/baby-st...verse.html

When you have mastered the chosen path through case studies and paper transactions, you are ready to invest with real money.

There are many asset classes and investment styles. If you are starting out, they can be confusing. My advise is to choose one combination of asset class and investing style and then get in-depth knowledge about the chosen path. This video is meant to help you do this.