Investment articles

This culinary French term translates to everything in its place. Cooking and investing are process-driven activities where greater outcomes can be attained by preparing ahead of time. Growing a Data Base of Companies is Mise en place. Before taking a position in a company, the individual has time to prepare, is relatively stress-free and there is no pressure to act.

Mise en Place and Investing a.k.a Why Process Matters

Failing to prepare when allocating capital can lead to less than satisfactory results and frantic decision-making. Having a well-defined process can take a great deal of the stress out of decision-making. The process of investing boils down to:

1. Understand what type of investor you want to be: Whether it is outstripping an index, achieving optimized performance, compounding whilst avoiding capital loss, or trade for residual income.
2. Understand how you want to manifest that investor type: How concentrated the position should be? What investing style best suits your personality? What portfolio turnover are you comfortable with?
3. Define what opportunities you seek: look for market leaders with a low likelihood of moat erosion, future market leaders with competitive advantages.
4. Write it down: investment policy statement can be invaluable during times of volatility or uncertainty.
5. When you have that down, you can more readily identify companies that fit within your investing universe. At this stage, the cooking process has still not begun.

Flow State and how does one achieve a flow state in investing?

A flow state is a state of deep focus, devoid of distraction when an individual is carrying out a task. The decision-making process can become a great deal more frictionless when the investor knows what they intend to do under certain circumstances. After establishing your process for investing, and deciding how you wish to undertake the construction of a portfolio, the next step is to discover the companies that will populate it. Assuming you have discovered a company, and it fits your criteria, it’s important to understand what you might do if things don’t go your way, ahead of time. Extracting the emotion from the investment equation is hard. Outlining a list of reasons that would allow you to sell a position can benefit you as it allows you to remember why you are invested, and why you would sell, and when those events happen, the activity doesn’t require extensive pondering over what to do. Whether that means selling once a certain IRR has been achieved or when there are signs of managerial deterioration, accounting irregularities, thesis creep, or some other red flag factor in the business, you are acting on a pre-defined catalog of responses.

Conviction

The best antidote is simply knowing what you own, knowing why you own it, and knowing what would have to occur to make you lose conviction. Preparation, when pressure is low, is a critical ingredient to ensuring that an investor can more readily focus on the task at hand when the act of investing becomes live. Flow states are impeded by distraction. The contemplation of appropriate response is a distraction best remedied by proactively establishing your catalog of responses, ahead of time. As Ramsay suggests, “time spent getting yourself ready is never wasted”.

Source: – Everything in it’s place by Conor MacNeil

Asset Multiplier Comments

• It’s all about doing the job ahead of time rather than catching up as needed.
• This is all about preparation before investing, which includes building company data bases. Maintaining data bases allows you to track the ongoing performance of your company. Based on the information acquired, the performances being tracked serve to indicate where a firm is presently and where the business will be in the future. Understanding what you have results in conviction. It’s a  cycle in which everything boils down to planning.
• The advantages of planning ahead of time are self-evident. Faster decision-making processes, as a result of preparation, can save us a significant amount of time when making decisions.
• An investment policy statement serves as a guide for portfolio building and proper monitoring. Assist to enhance focus on the investment objective and preventing mistakes caused by changing market conditions, which is a vital component in investing.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

This is taken from a presentation by Howard Marks Co-Founder of Oaktree Capital. This is the first in a series of articles to follow. Mr. Marks makes concise and incisive comments about the art of investing that can help amateur and professional investors alike.

Superior results don’t come from buying high quality assets, but from buying assets – regardless of quality – for less than they’re worth.

Benjamin Graham emphasized that margin of safety means never paying too much for a stock. The margin of safety would act as a buffer for unanticipated negative occurrences impacting the investment choice. This is the fundamental premise of value investing; with margin of safety, investors may reduce downside risk, insulate themselves from mistakes, and earn remarkable returns. A thorough examination of the financial accounts can aid in the identification of alpha opportunities.

Investors would be wise to accept that they can’t see the macro future and restrict themselves to doing things that are within their power.

The macro future consists of market cycles; hence markets are bound to correct in the current scenario. People do not miss their financial goals as a result of market corrections but due to their own reaction to the market correction. What we can do as rational investors is invest in stocks of a company with a viable business model by learning about their businesses, industries, and the business, as well as the elements that influence the business. Controlling emotions can benefit in financial decisions; nevertheless, this is easier said than done. Fear of loss can induce investors to act impulsively, making poor investing selections.

One of the main reasons for the sultry predictions is the enormous influence of randomness.

The economy is a broad network of interrelated production and consumption activities that help determine how finite resources are allocated. It is difficult to foresee each and every interconnected action with certainty. The one thing we can be assured of is that the future is unpredictable. Most investors cannot predict the macroeconomic future better than anyone else. In an unpredictable market, time-tested investing tactics may fail, causing investors to lose money.

Once in a while someone receives widespread attention for having made a startlingly accurate forecast. It usually turns out to have been luck and thus can’t be repeated.

Analysts and major brokerages often forecast an index’s climb to historic highs, particularly during bull runs. However, such forecasts are usually attention grabbers that drive more traffic to the blog or website. Usually, it turns out to be a lucky coincidence. Investors must strive to distinguish between market noise and market information about their stock. A methodical, calculated approach to building a balanced portfolio that meets your goals is far superior to putting everything on the line for one call. Investing decisions should never be made only on the basis of a single source or perspective. Coffee-can investing is a tried-and-true approach that never fails: buy low, sell high.

Source: Howard Marks- Truth About investing.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

Most mutual funds are run by people picking stocks or other investments that they think will earn above-average returns. Index funds, however, are passively managed. That is, they seek only to match (rather than beat) the performance of a given index. The goal of most actively managed funds is to earn a return greater than that of their respective indexes. Interestingly, most investors actually would be better off in index funds. Why? Due to the high costs of active management, the majority of actively managed funds fail to outperform their respective indexes.

Picking funds based on superior past performance was usually unsuccessful and proved to be only slightly better than picking randomly. If you’re looking to pick a future top performer, picking a low-cost fund is your best bet. And looking for low-cost funds naturally leads to the selection of index funds as likely top-performers.

Why Index Funds Win:  Because all the fund has to do is buy all of the stocks (or other investments) that are included in the index. When you compare such a strategy to the strategies followed by actively managed funds (which generally require an assortment of ongoing research and analysis, in order to try to buy and sell the right investments at the right times) index funds tend to have considerably lower costs than actively managed funds. It’s counterintuitive to think that by not attempting to outperform the market, an investor can actually come out above average.

A strategy for picking funds would be as follows:

1. Determine your ideal overall asset allocation (that is, how much of your overall portfolio you want invested in Indian stocks, how much in international stocks, and how much in bonds).
2. Determine which of your fund options could be used for each piece of your asset allocation.
3. Among those funds, choose the ones with the lowest expense ratios and the lowest portfolio turnover.

Source: Oblivious Investor

AM Comments-

• Passive investing is polar opposite of active investing, which is a more aggressive strategy offering possibility of larger short-term gains, but also accompanied by higher risk and volatility.
• Passive investing may be laissez-faire. It’s a well-thought, long standing philosophy which believes that even though the stock market does experience ups and downs, it inevitably rises over the long periods.
• The concept underlying passive investing is that the longer-term outlook on markets is bullish, which will result in financial gains along the course. As a result, it is better suited to investors with a longer time horizon, such as retirement planning.
• One of the primary reasons for the success of passive funds is their low cost. Fees for index funds in India are normally in the range of 0.1-0.2 percent of AUM, while fees for actively managed funds can range from 1-1.5 percent of AUM.

Passive investing is gaining traction in India as a result of greater mutual fund penetration and accessibility, which is no longer a barrier thanks to the availability of various online platforms.

Joe Wiggins stresses on correct behavioral commitments for long term investors by citing example of Homer’s Odyssey. Ulysses and his crew must navigate their ship past the sirens. The sirens produce a beguiling and irresistible song, which if heard would lead the men to their deaths. Ulysses applies some behavioral science. He instructs his crew to fill their ears with wax to avoid temptation and has himself tied to the mast to avoid action.

Most of us have long-term objectives best facilitated by doing less, yet the constant noise and narratives of markets are there to lure us into frequent injudicious decisions.

Being a long-term, low action investor is the easiest approach to adopt in theory, but the hardest in practice.

How do we make a commitment like Ulysses to protect us from our future investing selves? Plugging our ears means ignoring the chaotic vacillations of markets and the unpredictable path of the economy. Rarely checking our valuations, cutting off our subscriptions to financial news. Cancelling the brokerage account, losing the password for our portfolios, or adding elements of friction to slow an investment decision-making process. Avoiding anything that will entice us away from our plan.

Commitment devices do not have to be entirely restrictive. We might commit to acting only when certain extreme valuation levels are reached. This approach is obviously imperfect compared to an avoidance pact. Setting a high threshold for action, however, at least protects from the worst ravages of noise and overtrading.

A critical part of managing our behavior is understanding the challenges we will face and planning in advance how we will mitigate them. Good investment is primarily about making sensible decisions at the start and avoiding bad decisions on the journey. The problem is that the compulsion to veer off course is likely to be overwhelming.
Most of us want to be long-term investors, but unless we make the right behavioral commitments at the outset the siren song of financial markets will make that an impossible aspiration.

Source: Behavioral Investment by Joe Wiggins

Asset multiplier comments-

• Obsession with short-term market fluctuations makes sense only for day traders who earn money by accumulating minor gains and limiting losses in as many securities as possible.
• For investors with a long-term perspective, it is meaningless to analyze each and every event and its implications on your portfolio.
• Investors should understand clearly that volatility and risk are two different things. Reacting to volatility created by market news will only yield bad decisions i.e., buying at a higher price or selling too low.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

Nick Maggiulli writes on his blog that there are two kinds of risks in investing and in life—fast risk and slow risk. Fast risk is the stuff that makes headlines. It’s the things that we are warned about every day. The reason for this is simple—the consequences of fast risk are immediate and usually devastating. But then there’s slow risk. Slow risk is the accumulation of bad decisions that eventually leads to an unwanted outcome.

Slow risk doesn’t make headlines. Every time a hedge fund blows up you will probably hear about it. But you never hear about the person who sat in cash for 20 years because they were too afraid to get invested. Both are equally devastating, but one seems less spectacular than the other.

The simplest analogy to differentiate between fast risk and slow risk is heroin vs. cigarettes. Heroin is fast risk. Cigarettes are slow risk. Heroin tends to kill people quickly (especially in the event of an overdose), while cigarettes tend to kill people slowly.

Unfortunately, most of the time when people talk about risk, they are talking about fast risk. For example, stocks have lots of fast risk, but little slow risk. The S&P 500 could drop 20% tomorrow, but 30 years from now it’s likely to be much higher than it is today. On the other hand, cash has lots of slow risk, but little fast risk. Next year your dollar should be worth about the same as it is worth today. But 30 years from now? Not so much.

As your time horizon increases the risk of losing money in stocks decreases and the risk of losing money in cash increases. As Peter L. Bernstein noted in Against the Gods: Risk and time are opposite sides of the same coin, for if there were no tomorrow there would be no risk. This is why cash isn’t really a risk-free asset but more of a fast risk-free asset. Cash still has plenty of risk, but it is of the slow variety.

Source: dollarsanddata

Asset Multiplier Comments:

• Even little amounts, if correctly invested, may build up to a lot of money over a young investor’s time horizon. In financial markets, consistency is essential, and never underestimate the power of compounding.
• Every asset, whether debt, equities, hard cash, or art, carries a different degree of risk, but then so are the returns! Diversifying your portfolio will give you the required edge over the broader market while reducing the total risk of your portfolio.
• The risk in a portfolio of diverse individual stocks and assets will be less than the risk in holding any one of the individual stock or an asset, given that the risks of the various assets are not directly related. A portfolio that contains both assets will pay off most of the times, regardless of market conditions. Adding one risky asset to another can reduce the overall risk of an all-weather portfolio. It’s all about choosing the right combination of stocks among which to distribute one’s nest egg.
• Calculated investments, even in risky assets, may be better than haphazardly investing in debt funds.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”