S.T.A.M.I.N.A - Success Takes Accruing Money Into Numerous Assets.”
You need to own private and public income streams and focus on earnings, debt levels and dividends firstly and foremost. Growth includes setbacks and periods of zero growth, called “punctuated growth.”
The public markets are the largest poker game on the planet and it is a zero-sum game. There is a loser for every winner. People often cannot visualize how the investment markets work, and in a place full of actors, cheats, sharks and brilliant investors, you better understand that chasing performance and not focusing long-term will only lose you money and time.
Investing can be easy, or it can be hard, but what it is not, is predictable and constant. The average person who needs to invest for the benefit of saving for their financial freedom and goals needs to be willing to learn or be lucky. Otherwise you will be ill prepared and will lose by bouncing around to different institutions and service providers. Depending on the current environment/ investment cycle, it could be easy or hard to perform in the current environment and the genius or idiot you experience, is based more on the underlying timing of deposits/withdrawals then any above normal intelligence on your investment advisors’ part, with some exceptions.
The focus should be on knowing the game and ignoring the noise, while focusing on the underlying business and asset opportunities present. “A stock is not just an electronic blip and trading opportunity, it is an ownership interest in a business with a real value that does not depend on share price.” The stock market is where many participant’s come together to bid/ask daily, where everyone knows the price of everything but not the value. There is the famous business partner analogy where owning a public stock is like having a business partner who comes into your office everyday and asks to buy your 50% of the business.
It goes like this:
- Everyday your partner will march into your office and try and buy your share of the business. Everyday you notice the price is always different and is based more on the emotional state of your partner, then the value of the business. Armed with this information you can choose to ignore him when he is depressed and pessimistic, or look at entertaining him when he is wildly optimistic.
Socioeconomics and behavioural finance explain that social mood creates the tenure of events that unfold. Social mood determines stock and investment prices and the cycles in existence.
You need to focus on what you own and in holding cash as a defensive against high prices and volatility. Volatility is a trader’s or speculator’s dream, but for the investor you must stay strong and focus long-term, otherwise you can get off track when emotions play into current market trends.
Not all time periods produce the same results and productivity, innovation, sales, GDP, debt and other metrics go through periods of both growth and setbacks. In good times people feel good about borrowing to open and expand businesses and invest in the stock market. In contraction periods, not as many people feel like taking risks and people are less optimistic. Getting funding during periods of negative social mood can also be a difficult task. Recognize nothing goes on forever and do not be blind betting optimistically into the idea of infinite price expansion at a market top, without being aware of periods of prolonged setbacks as well.
An important observation is there is not always a connection between a marketable security and the underlying business value. The market creates very attractive opportunities to buy and sell. If you are fully invested when the market declines, portfolios tend to drop in value, limiting your opportunity to buy at a lower level. The price of a security does not tell any information about the underlying business. Business metrics tell about the underlying business, not price. The only thing price tells us is if the public on average value the business wildly cheap or wildly expensive. These market prices are used for rate of return figures and at times ROR should be ignored with a focus on long-term strategy. Don’t abandon your strategy based on current return, or current market prices.
“Like many other financial-market phenomena there is some cyclicality to interest rate fluctuations. High Interest rates lead to changes in the economy that are precursors to lower interest rates and vice versa. Knowing this does not help one make particularly accurate forecasts, however, for it is almost impossible to envision the economic cycle until after the fact. At times when interest rates are unusually low, however, investors are likely to find very high multiples being applied to share prices. Investors who pay these high multiples are dependent on interest rates remaining low, but no one can be certain they will. This means that when interest rates are unusually low, investors should be reluctant to commit capital to long-term holdings unless outstanding opportunities become available, with a preference to holding cash or investing in holdings that turn to cash quickly for redeployment when available returns are more attractive. "
– Seth Klarman
“The value investment approach of buying undervalued securities one at a time is in its nature contrarian. This is because there must be a reason for the undervaluation and undervalued securities are usually out of favor for some reason. Popular securities usually never are undervalued. As the saying goes, what the herd is buying, by definition, is in favor. When the herd is selling securities, there are opportunities to pick up bargains. “Investors may find it difficult to act as contrarians for they can never be certain whether or when they will be proven correct. Since they are acting against the crowd, contrarians are almost always initially wrong and likely for a time to suffer paper losses.”
“In the short run, the stock market is voting machine, but in the long run it is a weighing machine.” What this means, is in the short run prices likely do not reflect underlying business value but over the long-term there will be a time, where the securities will trade at underlying value.
It’s an interesting dynamic when you understand that markets have forces that trick people into betting into optimism and selling into extreme pessimism, which is obviously not what you want to do. Most people do it, oblivious to the fact that they're even doing it. My guess is lifetimes are too short and market dynamics too strong. Understanding how the stock market works will change the way an investor looks at investments forever. It has been stated, that approximately 1/3rd of hedge funds excess returns are attributable to investor flows. As a result, positive flows tend to create positive price pressure and negative flows create negative price pressure. Professional investors take advantage of these price flows and the price effects reverse within months or some cases years.
On picking money managers, “Many investors mistakenly choose their money managers the same way they pick horses at the race track. They see who has performed well lately and bet on them. It is helpful to recognize that there are cycles of investment fashion; different investment approaches go in and out of favor, coincident with recent fluctuations in the results obtained by practitioners. If a manager with a good long-term record has a poor recent one, he or she may be specializing in an area that is temporarily out of favor. If so, the returns achieved could regress to their long-term mean as the cycle turns over time, several poor years could certainly be followed by several strong ones.”
“We’ve maintained a commonsensical, albeit increasingly unconventional approach to investing, in that we strive to maintain a long-term perspective in a world in a world of short-term actors, and we patiently hold cash in the absence of compelling opportunity, refusing to pull the trigger until the target is clear and compelling.” Most investors will struggle to follow such a disciplined and inactive approach, that’s why those that are willing to have been able to profit so immensely.”
“Don’t buy a single share of stock unless you are willing to buy the entire business and own it forever. Under that lens, the only consideration one should have is the future cash flow of the business.”
Understand that losses are part of the process and that even professional brilliant investors, still make mistakes.
Some of Warren Buffet’s mistakes are listed for an example. Even the most famous investor makes mistakes and loses money on some investments.
Dexter Shoe Co. – Spent 433 Million in Berkshire stock on the purchase. The company had no competitive advantage and went bankrupt. Estimated cost since he used Berkshire stock instead of cash. 3.5 Billion.
Conoco Phillips- Bought 85 million shares in 2008, invested 7 billion and the shares ended up being worth 4.4 billion with an estimated cost of negative 2.6 billion.
Energy Future Holdings- Suffered a pre-tax loss of $873 Million.
General Reinsurance – covered $800 million of the companies Losses in 2001.
Even with some notable mistakes, Geico and See’s Candies have more than made up for any mistake along the way, along with other winning investments for Buffet and Berkshire Hathaway.
More important then return is strategy, discipline, risk management and patience. If you have those things the returns will come. There are a lot of people who have went through periods of great success and made a lot of money at times, there is far fewer who have been able to hang on to the wealth throughout many cycles.