26-12-2014, 11:35 PM
I think it would be useful to start a thread to discuss what we have learnt during our investment journey, and also how we can sharpen our skills and analyze mistakes so that we do not repeat them.
I am confident everyone has something to share and can chip in to make this thread a useful one, for both veteran investors as well as newbies.
Let me start off by stating my own:-
1) Always keep an eye on the business - There's no such thing as a "blue chip" company doing good for years on end. The dynamics of business are such that there is always competition, costs are always going up and there's always a threat of substitute products. I've learnt that keeping an eye on the business helps me to understand when I should sell, and when I should buy.
2) Expanding my circle of competence - Although Munger says that it is important to know the limits of one's own understanding of businesses by defining their circle of competence; I'd say that never-ending learning is also important as it helps to broaden your circle of competence and gives you better insights into how businesses work. For this year, I've been reading up on various industries and companies (through initiation reports) and in the process I have enhanced my understanding of different types of businesses.
3) Understanding the role of psychology in investing - Too many focus on the mechanics of investing (i.e. the process, numbers, valuation etc) without giving much thought to the psychological aspects of investing. I spent most of the year reading up on psychology and how it can affect my investment(s). The three most common are hindsight bias, confirmation bias and loss aversion. It is important to write down your thesis and rationale for purchasing or selling an investment so that we do not suffer from hindsight bias. To combat confirmation bias, I actively seek out information which contradicts my thesis so as to gain a more holistic view of a company or investment.
4) Learning about asset allocation - Most investors don't pay much attention to asset allocation, and I have noticed this from blogs where people put up their portfolio, and also from forumers who may purchase companies in varying amounts to add to their portfolio(s). You should allocate the bulk of your funds into your highest conviction idea with the lowest risk, but it takes some time to figure out which company in the portfolio has the lowest risk. We tend to allocate capital by saying "oh I have $XXX to deploy and so I bought YYY". But the right way to look at it would be - should I sell position A to buy positions B and C as this will lower the overall risk of something going wrong with my portfolio. Noteworthy I feel, and every investor should think of this.
5) What has been priced in? - An extension of the psychology point above (3). Knowing what has been reflected in the share price is important as it reflects our knowledge of optimism, expectations and future prospects. The reason why it is tough to buy "cheap" is because high valuations have already priced in rosy prospects many years into the future. Buying a good company at expensive valuations can only result in lower overall returns and much disappointment when things do not turn out as they seem. On the flip side, if a company has priced in a no-growth scenario or expectations are poor, perhaps it may be worth considering especially if you did your analysis well and have insights into the situation.
6) To focus more on risk, rather than returns - Probably the most important lesson of all, and one which I have to constantly remind myself to do. The 5.5 year bull market has led many investors to focus only on the upside and how they can make; and therefore the downside risks have been neglected, or glossed over. We need to get back to basics on how we should mitigate risk and achieve adequate margin of safety - all this can be achieved if an appropriate level of research and groundwork is put in place before any action is taken.
So that's all for now. Hope others can chip in too and share what they have learnt on value investing.
Happy New Year!
I am confident everyone has something to share and can chip in to make this thread a useful one, for both veteran investors as well as newbies.
Let me start off by stating my own:-
1) Always keep an eye on the business - There's no such thing as a "blue chip" company doing good for years on end. The dynamics of business are such that there is always competition, costs are always going up and there's always a threat of substitute products. I've learnt that keeping an eye on the business helps me to understand when I should sell, and when I should buy.
2) Expanding my circle of competence - Although Munger says that it is important to know the limits of one's own understanding of businesses by defining their circle of competence; I'd say that never-ending learning is also important as it helps to broaden your circle of competence and gives you better insights into how businesses work. For this year, I've been reading up on various industries and companies (through initiation reports) and in the process I have enhanced my understanding of different types of businesses.
3) Understanding the role of psychology in investing - Too many focus on the mechanics of investing (i.e. the process, numbers, valuation etc) without giving much thought to the psychological aspects of investing. I spent most of the year reading up on psychology and how it can affect my investment(s). The three most common are hindsight bias, confirmation bias and loss aversion. It is important to write down your thesis and rationale for purchasing or selling an investment so that we do not suffer from hindsight bias. To combat confirmation bias, I actively seek out information which contradicts my thesis so as to gain a more holistic view of a company or investment.
4) Learning about asset allocation - Most investors don't pay much attention to asset allocation, and I have noticed this from blogs where people put up their portfolio, and also from forumers who may purchase companies in varying amounts to add to their portfolio(s). You should allocate the bulk of your funds into your highest conviction idea with the lowest risk, but it takes some time to figure out which company in the portfolio has the lowest risk. We tend to allocate capital by saying "oh I have $XXX to deploy and so I bought YYY". But the right way to look at it would be - should I sell position A to buy positions B and C as this will lower the overall risk of something going wrong with my portfolio. Noteworthy I feel, and every investor should think of this.
5) What has been priced in? - An extension of the psychology point above (3). Knowing what has been reflected in the share price is important as it reflects our knowledge of optimism, expectations and future prospects. The reason why it is tough to buy "cheap" is because high valuations have already priced in rosy prospects many years into the future. Buying a good company at expensive valuations can only result in lower overall returns and much disappointment when things do not turn out as they seem. On the flip side, if a company has priced in a no-growth scenario or expectations are poor, perhaps it may be worth considering especially if you did your analysis well and have insights into the situation.
6) To focus more on risk, rather than returns - Probably the most important lesson of all, and one which I have to constantly remind myself to do. The 5.5 year bull market has led many investors to focus only on the upside and how they can make; and therefore the downside risks have been neglected, or glossed over. We need to get back to basics on how we should mitigate risk and achieve adequate margin of safety - all this can be achieved if an appropriate level of research and groundwork is put in place before any action is taken.
So that's all for now. Hope others can chip in too and share what they have learnt on value investing.
Happy New Year!
