Tag - #valueinvesting

    • Tag -
  • #valueinvesting
12 Jan

#Truths about investing 103- Think differently

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

You have to think in a way that departs from the consensus; you have to think differently and better. The price of a security at a given point in time reflects the consensus of investors regarding its value. The big gains arise when the consensus turns out to have underestimated reality. To be able to take advantage of such divergences, you have to think in a way that departs from the consensus; you have to think differently and better. Any time you think you know something others don’t, you should examine the basis for that belief. Ask Questions like- “Does everyone know that?” or “Why should I be privy to exceptional information or insight?”

It isn’t the inability to see the future that cripples most efforts at investment. More often it’s emotion. Investors swing like a pendulum – between greed and fear, euphoria and depression, credulousness and skepticism, and risk tolerance and risk aversion. Usually, they swing in the wrong direction, warming to things after they rise and shunning them after they fall. Technology now enables them to become distracted by returns daily. Thus, one way to gain an advantage is by ignoring the noise created by the manic swings of others and focusing on the things that matter in the long term.

To be a successful investor, you have to have a philosophy and process you believe in and can stick to, even under pressure.

Since no approach will allow you to profit from all types of opportunities or in all environments, you have to be willing to not participate in everything that goes up, only the things that fit your approach. To be a disciplined investor, you have to be able to stand by and watch as other people make money in things you passed on. Every investment approach – even if skillfully applied – will run into environments for which it is ill-suited. That means even the best of investors will have periods of poor performance. Even if you’re correct in identifying a divergence of popular opinion from eventual reality, it can take a long time for the price to converge with value, and it can require something that serves as a catalyst. To be able to stick with an approach or decision until it proves out, investors have to be able to weather periods when the results are embarrassing.

Source- Truth’s about investing by Howard Marks

Asset Multiplier Comments:

  • Investors with a longer time horizon are less likely to make emotional judgments. A properly allocated portfolio has the appropriate mix of equity and fixed-income asset classes to provide an investor with the highest chance of success. This means retiring comfortably without running out of money.
  • A sound investment philosophy is founded on a thorough knowledge of markets. Determine the return you require, the income you will need for your retirement expenses, and the degree of portfolio appreciation you need to achieve that. Selecting a plan and adhering to it is also part of your investment philosophy. Passive investing might just be your investment philosophy.
  • Adhering to your philosophy entails avoiding emotion-driven buy-and-sell choices and sticking to your intended allocation regardless of market movements. The whole objective of allocating according to a strategy is to prevent hopping in and out of assets on the spur of the moment.

 

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.”

 

By Investment articles , , 0 Comments Read more...
27 Dec

#Truth about investing 102-Efficiency and behavior

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

Most investors behave pro-cyclically, to their own detriment.

In a rising market, even fundamentally weak companies look great technically. Fear of Missing Out (FOMO) kicks in, making people more optimistic and causing them to purchase at market highs. When the inverse is true, their pessimism grows, encouraging them to sell at cyclical lows. As a result, the retail investor is left with equities with high purchase prices but poor fundamentals.

Cyclical ups and downs don’t go on forever. But at the extremes, most investors act as if they will.

At market extremes, emotions- fear and greed are at their highest levels. People buy at market highs and sell at market lows. When people start believing in trends rather than market cycles, that’s when behavioral mistakes occur. It is usually best to ignore the current market and stick to the fundamentals at sky high emotions.

It’s important to practice “contrarian” behavior and do the opposite of what others do at the extremes.

Market does not trade at extreme ends for a long time. When there is a widespread notion that there is no risk, investors believe it is safe to engage in dangerous behaviour. Acting contrary to the market during phases of soaring emotions might provide us with optimum entry and exit points. As a result, we must sell when others are greedy and purchase when they are fearful.

While not all markets are efficient – and none are 100% efficient – the concept of market efficiency must not be ignored. In the search for market inefficiencies, it helps to get to a market early, before it becomes understood, popular and respectable.

Humans are predisposed to identify patterns and exploit them; however, these patterns and trends are already priced in by the markets. Higher the efficiency of the market the faster are the patterns and trends priced in. In established markets, however, efficiency diminishes the frequency and scale of opportunities to overcome the consensus and identify mispricing or inefficiencies. The sooner you invest in an inefficient market, the easier it is to profit as markets become more efficient. If the other investors are few, inexperienced, or prejudiced, you will have the first mover advantage; as Warren Buffet correctly stated, “First comes the inventor, then the imitator, and last the fool.”

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.”

By Investment articles , , , , 0 Comments Read more...
02 Dec

A walk in the park

The legendary US-based investor, Bill Miller, provided a list of worries in his latest 2021 third-quarter letter: “Today’s worries include, but are not limited to, China’s regulatory actions, high and rising fuel and food prices, labor shortages, inflation or stagflation, the effect of Federal Reserve tapering, disrupted supply chains, potential default due the debt limit standoff and the ongoing dis-function and polarization in Washington.”

What should investors be worrying about now?

A walk in the park :  There was once a lady who liked to walk her young dog each morning using a very long leash. Her dog was always easily excitable. It would dart all over the place. You could never guess where the dog would be from one minute to the next. But over the course of the two hour stroll, you can be certain that the dog is heading east at five kilometers per hour. What’s interesting here is that almost nobody is watching the lady. Instead, their eyes are fixed on the dog. If you missed the analogy, the dog represents stock prices while the lady represents the stocks’ underlying businesses.

Optimism: There are 7.9 billion people in the world today who will wake up every morning wanting to improve the world and our own lot in life – this is ultimately what fuels the global economy and financial markets. This is the lady, walking steadfastly ahead, holding her dog on a long leash. And this is ultimately what investors should be watching.

Source: The Good Investors

Asset Multiplier Comments: –

As minority shareholders, we participate without any control or influence on the operations of a company. We trust the management to adjust the business depending on the headwinds or tailwinds that they face. What we need to focus on is on identifying businesses which have great products or services, guarantee longevity of profits and sustainable growth, and have the ability to withstand shocks and cyclical downturns. Stocks prices may be volatile for any number of reasons. Investors should tune this noise out and focus on movement of the business as seen in quarterly results. Performance of the business will eventually be the driver of share price.

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.”

By Investment articles , , 0 Comments Read more...
24 Oct

Luck Vs. Skill in Investing

Jeremy Chia reminds us that investing is a game of probabilities. In any game where probability is a factor, luck undoubtedly plays a role. This leads to the age-old question of how much of our investment performance is impacted by luck?

Is an investor who has outperformed the market a good investor? Similarly, is an investor who has underperformed the market a lousy investor? The answer is surprisingly complex.

Long term stock prices tend to gravitate toward the present value of the company’s expected future cash flow. However, that future cash flow is influenced by so many factors that result in a range of different possible cash flow possibilities. Not to mention that on rare occasions, the market may grossly misprice certain securities. As such, luck invariably plays a role.

Skill is one aspect of investing that is hard to quantify. However, there are a few things Chia looks at. First, we need to analyse a sufficiently long track record. If an investor can outperform his peers for decades rather than just a few years, then the odds of skill playing a factor become significantly higher. Although Warren Buffett may have been lucky in certain investments, no one can deny that his long-term track record is due to being a skilful investor.

Next, focus on the process. Analysing an investment manager’s process is a better way to judge the strategy. One way to see if the manager’s investing insights were correct is to compare his original investment thesis with the eventual outcome of the company. If they matched up, then, the manager may be highly skilled in predicting possibilities and outcomes.

Third, find a larger data set. If your investment strategy is based largely on investing in just a few names, it is difficult to distinguish luck and skill simply because you have only invested in such a few stocks. The sample is too small. But if you build a diversified portfolio and were right on a wide range of different investments, then skill was more likely involved.

Mauboussin wrote: “One of the main reasons we are poor at untangling skill and luck is that we have a natural tendency to assume that success and failure are caused by skill on the one hand and a lack of skill on the other. But in activities where luck plays a role, such thinking is deeply misguided and leads to faulty conclusions.”

Chia concludes that it is important that we understand some of these psychological biases and gravitate toward concrete processes that help us differentiate between luck and skill. That’s the key to understanding our own skills and limitations and forming the right conclusions about our investing ability.

By Weekend Reading , , 0 Comments Read more...