Investment articles

Discipline and Investing!


Discipline and Investing!

An investment philosophy contains the core beliefs that guide an investor’s actions and decisions.  How many times have people heard people say “Meditation has changed my life” or “Running has changed my life”.

Is it true that meditation, running, cycling, or going to a gym can change a person’s life? Well, it is the whole process that helps – not just the act itself. Let us say someone starts meditating 3 times a day for 10 minutes each. Once at 7 am, once at 1 pm, and once at 7 pm. Breakfast, lunch, and dinner? In the first week, they do 4 days and miss 3 days. Next week they do 5, then 6 and in 3 months they are meditating for 15 minutes at each session. Now, this ensures that they go to bed at say 11 pm at least – so that they can get up at 6 am and do their meditation at 7. This means no late-night parties – no drinking binges, etc.

So the activity of meditation has brought a lot of discipline to their life. That helps as much as the meditation itself! Ditto for running, cycling – the process helps. After 6 months or 1 year, they go around saying “meditation helps”. True, but partially.

When it comes to investing, again the first step is discipline – to start saving money. That is the toughest part. Once a person learns to save, doing a SIP is not so tough. The discipline of saving says 20% of a person’s salary is a good target to start with. Doing a SIP in an index fund is ideally recommended till one starts learning about investing.

So doing a SIP is about the discipline of taking money away from an investor as soon as it comes. It is one of the best ways of investing for a young person just starting to invest. It works just as well for a seasoned investor who does not want the need to think every day about where and what to invest.

Like meditating, once someone decides to think of saving and tell themselves that Rs. 10,000 per month should be the SIP amount – it can happen. Investors need not fret over missing one or two installments as it takes time to build in the discipline.

Creating wealth is a long-term, multi-year, multi-decade, multi-generational process. Somebody needs to make a start. The ideal age of course is 22, but it is even better if an investor’s father or grandfather had started the process. If they have not, anyone could. We hear such stories very often. Of SIPs started in 1999, 2008, …and continuing. The amount of wealth created is amazing.

On the other hand, we regularly read about celebrities who earned Millions of Dollars going bankrupt. Being driven to suicide. Yes, discipline is boring – especially when investors are young. However, at a later date, the same discipline gives you Financial freedom. Ironic is it not? Discipline leads to freedom!

Source: subramoney by P V Subramanyam

Asset Multiplier Comments:

  • Investing has very little to do with finance and a lot to do with human behaviour. Sticking to an investment strategy in a disciplined manner ignoring other temptations is the easiest way to build wealth over time.
  • Disciplined investing also gives the added benefit of staying invested over the long term ignoring the short-term fluctuations and volatility in the market. Acting during volatility is one of the most prominent reasons for wealth erosion for investors.

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.”

 

The Get Rich Slowly Investment Philosophy

 

 

 

 

 

 

 

 

The Get Rich Slowly Investment Philosophy

An investment philosophy contains the core beliefs that guide an investor’s actions and decisions when saving for the future. It’s like the money blueprint for the stock market. Without a defined philosophy, the choices become arbitrary. Investors buy and sell based on whim and emotion. When there’s a clear ideology, the options become limited to strategies that fit the investment beliefs.

Back when I was doing stupid stock-market tricks, I didn’t have a coherent investment philosophy. Today, I do. After a decade of reading and writing about money, I’ve come to believe that a smart investor should:

Start early. “The amount of capital you start with is not nearly as important as getting started early,” writes Burton Malkiel in The Random Walk Guide to Investing. “Every year you put off investing makes your [goals] more difficult to achieve.” The secret to getting rich slowly, he says, is the extraordinary power of compounding. Given enough time, even modest investment returns can generate real wealth.

Spread the risk. Another way to smooth the market’s wild ups and downs is through diversification, which simply means not putting all of the eggs into one basket. Own more than one stock, and own other types of investments. When investors spread their money around, it decreases risk while (counter-intuitively) earning a similar return.

Keep costs low. In Your Money and Your Brain, Jason Zweig notes, “Decades of rigorous research have proven that the single most critical factor in the future performance of a mutual fund is that small, relatively static number: its fees and expenses. Hot performance comes and goes, but expenses never go away.

Keep it simple. Most people make investing far too complicated. There’s no need to guess which stocks are going to outperform the market. Average investors probably can’t. For the average person, it’s much easier and more profitable to simply buy index funds.

Make it automatic. It’s important to automate good behavior so that investors don’t sabotage themselves. You want to remove the human element from the equation. It is recommended to create a monthly transfer from a savings account to an investment account.

Ignore everyone. Everyone might think that a smart investor pays attention to daily financial news, keeping his finger on the pulse of the market. But they are wrong. Smart investors ignore the market. If someone is investing for twenty or thirty years down the road, today’s financial news is mostly irrelevant. Decisions should be based on investors’ personal financial goals, not on whether the market jumped or dropped today.

Conduct an annual review. While it does zero good to monitor investments daily, it’s smart to look things over occasionally. Some folks do this quarterly. The author recommends once per year. An annual review lets the investor shift their money around if needed. And it’s a great time to be sure if the investment strategy still matches the goals and values.

Source: The Get Rich Slowly investment philosophy and strategy by J.D Roth

Asset Multiplier Comments:

  • Simplicity is often key to prolonged success having a simple investing philosophy limits the number of investment strategies at disposal. Adopting an investment philosophy that slowly compounds wealth will help investors outperform most other individual investors over the long term.
  • Investing based on emotions and whims may result in some lucky gains but it cannot be a sustainable basis for creating wealth.

Don’t invest like a Billionaire…

“If you want to learn how to shoot a cover drive, emulate Sachin Tendulkar. If you want to learn how to cook, watch Sanjeev Kapoor. If you want to get rich, do what rich people do…right?”

This is a often repeated fallacy that imitating rich and famous people’s investing strategies will result in success, however nothing could be farther from the truth. The intuition is obvious—if that person is rich, they must know how to handle their finances. And if they’re doing something with their money, I should probably do the same thing. 

The problem with this strategy is that their investing goals might be completely different than yours, aside from growing your wealth, there might be nothing common between your financial dreams and theirs. The rich and famous make investment choices that align with their lifestyles. 

A famous renowned mutual fund manager that can, and does, change strategies in a heartbeat. If he’s bullish on electric motorcycles on Monday morning, he may sell the entire position by Thursday afternoon. Within the last few months, he may have short sold the stock of any automobile company, and called for “the mother of all crashes” in crypto. You’ll see plenty of articles about what Mutual Fund Managers may be trading at any point in time because “Guess what this ace investor is Buying…” is a click-inducing headline. But it’s impossible to track his whipsawing strategy by following the headlines—you’ll only know his next move well after it’s made. You can follow him into the halfpipe, but you might end up in traction.

the CEOs and insiders—is it possible that these folks are selling because they know disaster is around the corner? Sure. But let’s remember that these people sometimes just need cash, too. Most of a CEO’s pay doesn’t come in the form of a biweekly salary; it comes in stock-based compensation. So, whether they want to buy a boat or need to pay their kid’s tuition, selling stock will be the primary way to get cash. They might also be selling as part of an ongoing plan to reduce their concentration in their company’s stock. Diversification is a tenet of Investing 101, hardly an ominous sign of impending doom. You can follow them into the halfpipe, but you might be misinterpreting their motives.

The lesson is simple, the right investing strategy can’t be found by blindly imitating rich people or by listening to “experts” on the news channels every morning. Investing is a very personal discipline, and you don’t know their time horizons, motivations, or even their personal finance acumen—plenty of rich folks end up going broke.   

Ultimately, you can’t find the “right” strategy by following anyone in the world because the search begins within YOU. Your goals, your saving and spending habits, and your personality are unique and crucial inputs to your investment strategy. If you need help matching YOU with your investments, it’s time to talk to a financial advisor. The best advisors aren’t the smoothest talkers or those with the most expensive suits. The best advisors are those who truly listen to understand you, then devise a strategy that fits.     

Source: Don’t invest like a billionaire by demystifyingmarkets.com

Asset Multiplier Comments

  • Investing is a deeply personal exercise that is based on a lot of parameters which differ from person to person. Blindly following rich people or investing gurus for financial advice is not the best approach to investing.
  • Everyone’s income, savings, goals regarding investing, expectations from wealth generation is different, so the best way to start investing is consulting a financial advisor who can help us with a tailor-made plan for 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.”

 

What to do in these times?

As Indian markets continue to fall along with most other international markers, investors are wondering if this is the time to buy their favorite stocks. The latest trigger for the decline was the Russia – Ukraine conflict. The situation keeps changing every day but the impact on commodities – oil, sunflower oil, metals such as aluminum, copper and nickel, corn, wheat – prices have been immediate. The auto industry would be specifically affected as Russia is also a significant supplier of palladium a key component in semiconductor chips. Natural gas prices are already on the rise and Russia’s ejection from the global swift system could cause a lag in trade payments affecting balance sheets. The best outcome from investors’ perspective would be the cessation of hostilities and the world going back to its previous way of working. The possibility of this happening is fairly low.

Indian investors have to worry about three more developments in early March. We expect oil prices to be increased any time after 7th March (the last date of polling in UP). Credit rating agency ICRA points out that “While it is difficult to pinpoint the exact amount of lagged revision in RSPs (retail selling prices) of MS (motor spirit) and HSD (high-speed diesel) that is warranted by the surge in crude oil prices to the current levels, we expect it to be in a range of Rs 6-8/litre, i.e., similar to the cushion offered by potential excise reversion to pre-Covid rates,” its Chief Economist Aditi Nayar said in a report.

The international crude oil price, in Indian basket terms, surpassed the USD 100 per barrel mark on February 24 for the first time since September 4, 2014, the report said. The price of the Indian crude oil basket has averaged USD 93.1 per barrel so far in February 2022, a 10.5 percent surge relative to USD 84.2 per barrel in January 2022, it added.

Another development to watch out for is the results of five state assembly polls that will be announced on 10th March. Global investors are watching Fed action on interest rates to be announced on 16th March. This may bring some volatility to asset prices in emerging markets such as India.

The third development to watch will be the IPO of Life Insurance Corporation. The timing and size of the issue have not been announced yet. This could be a very large issue and reduce the liquidity in the market. Investors may sell other holdings to invest in this IPO. This could lead to a decline in share prices around the time of the IPO.

Another development to watch out for would be the conclusion of the Winter Olympics in China, which had affected the supply of key raw materials, especially heavy metals and pharma companies, due to Beijing’s determination to reduce pollution. We can expect the supply chain woes dependent on Chinese raw materials to ease, lowering the pressure on costs.

Should we add defensive sectors to the portfolio?

In uncertain economic times, investors have preferred to invest in defensive sectors like software services, pharma, and the consumer sector in the past. Is it time to do that again now?

We think the demand outlook for these sectors might not get impacted in the short term but high commodity prices will keep the margins under pressure for longer than anticipated. Companies will struggle to protect their margins and juggle between passing the inflation to consumers and cost-cutting. This may impact profit outlook adversely for the medium term eventually impacting the share prices. Industries getting impacted due to the shortage/inflation of RM and energy prices will have to cut down their discretionary spending. Companies may have to restrict ad and IT budgets to protect their margins. This may slow down the growth of Media and Entertainment and software companies in the medium term.

In summary, we think that investors should be patient with their investments before any clarity emerges on the prevailing economic issues- how the war and Indian elections affect the oil prices and Fed’s meeting on 15th March.

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.”

Ignoring the risks of Macro Events


The Russian army’s invasion of Ukraine is the latest macro event that has investors concerned about equity markets. It is also the latest macro event that most investors would do well to ignore.  We worry about specific, prominent issues because we want to protect against the losses that may occur if our worst fears are realised. The irony is the most sure-fire way for investors to make consistent and substantial losses is by jumping from one high profile risk to the next, making consistently poor decisions along the way.

We have all seen the charts depicting the benefits of taking a long-term approach to equity investing.  They show how markets have produced strong returns in-spite of wars, recessions, and pandemics. They are a great illustration of the benefits of a long-term approach, but they don’t tell us everything. What they fail to show is all those critical issues that worried investors but never came to pass. We are always wondering about the next great risk to markets; the key to successful investing is finding ways of drowning out this noise.

Even though we can be certain that there are some events that will cause dramatic (short-term) losses for risky assets; ignoring them is absolutely the best course of action for most long-term investors. This is for a host of reasons:

We cannot predict future events: Pre-emptively acting to deal with prominent risks that pose a threat to our portfolios requires us to make accurate forecasts about the future. Something that humans are notoriously terrible at.

We don’t know how markets will respond: We don’t only need to forecast a particular event; we also need to understand how markets will react to it. What is in the price? How will investors in aggregate react? Even if we get lucky on point one, there is no guarantee we will accurately anticipate the financial market consequences. It is worth pausing to reflect on these first two reasons. Forecasting events and their impact on markets is an unfathomably complex problem to solve. We are incredibly unlikely to succeed in it.

We are poor at assessing high profile risks: We tend to judge risks not by how likely they are to come to pass, but how salient they are. This a real problem for macro events because the attention they receive makes them inescapable, so we greatly overweight their importance in our thinking and decision making..

We need to be consistently right: Even if we strike lucky and are correct in adjusting our portfolio for a particular event, that’s not enough – we need to keep being right. Over the long-run being right about any individual prominent macro event is probably more dangerous than being wrong, because it will urge us to do it again.

If we find ourselves consistently worried about the next major risk that threatens markets, there are four steps we should take:

1) Reset our expectations: Investing in risky assets means that we will experience periods of severe losses. These are not something we can avoid. They are the reason why the returns of higher risk assets should be superior over time. We cannot have the long-term rewards without bearing the short-term costs.

2) Check we are holding the right investments: The caveat to ignoring the risks of major macro events is that we are sensibly invested in a manner that is consistent with our long-term objectives

3) Engage less with financial markets and news: There is no better way to insulate ourselves from short-term market noise and become a better long-term investor than to stay away from financial markets. Stop checking our portfolio so frequently and switch off the financial news.

4) Educate ourselves about behaviour, not macro and markets: What really matters to investors is not the latest macro event or recent markets moves, but the quality of our behaviour and decision making.

Source: Most Investors Should Ignore the Risk of Major Macro Events By Joe Wiggins

Asset Multiplier Comments:

  • Macro Events are a recurring feature of the markets, trying to anticipate when they will occur, rather than accepting them as an expected feature of long-term investing, will inevitably lead to worse outcomes.
  • Provided we are appropriately diversified, the real investment risk stemming from major macro events is not the issue itself but our behavioural response to it – the hasty decisions we are likely to make because of the fears we hold.
  • Long Term Investors are better off not being bothered by macro events and it’d serve them well to not check their Portfolio Performance daily to avoid unwise decisions.

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.”

Performance Chasing and Outcome Bias

“Money flows into most funds after a good performance and goes out when bad performance follows.” (John Bogle)

We have all seen the wording discretely appended to mutual fund marketing stating that ‘past performance is no guide to future results’. Despite the ubiquity of this message, we struggle to heed its warning. This leads to the damaging behaviour of performance chasing, where we sell our holdings in laggard fund managers and reinvest in recent winners.

The tendency of mutual fund returns to experience mean reversion shows that our propensity to sell strugglers and buy recent winners is not just pointless; it is often the exact opposite of what we should be doing.

This damaging behaviour is driven by outcome bias.  Attempting to mitigate outcome bias and prevent performance chasing behaviour means overriding our instincts and also having a willingness to fail unconventionally.  Neither of these is simple, but that does not mean there is nothing we can do.

How Can We Prevent Performance Chasing?

Outcome bias cannot be switched off.  Whilst awareness is a starting point, it is evident from our continued performance chasing behaviour that it alone is insufficient.  We need to make clear and focused interventions to change our behaviour:

Stop Using Performance Screens: Mutual fund performance screens are ubiquitous across the investment industry. Everyone uses some form of historic performance screen to rank funds. Outcome bias and the performance chasing behaviour that follows are difficult enough to avoid even if you are not actively employing tools that encourage it. So, it is best avoided.

Create decision rules: A simple step to avoid performance chasing behaviour is to create fixed decision rules that strictly prohibit it. On average, it should be an effective means of avoiding the cost of purchasing active managers with a high potential for severe mean reversion.

Go Passive: The best behavioural interventions are the simple ones. Anything that requires behavioural discipline or continued effort raises the prospect of failure. Given this, what is the best way to avoid performance chasing in active mutual funds?  We can restrict ourselves to buying only passive market trackers.

Specify the activity in which you believe skill exists: When investing with an active manager, we are taking the view that the underlying manager has some form of skill. We tend, however, to be very vague about what we mean by this.

Extend your time horizons: Our susceptibility to outcome bias is greatly influenced by the time horizons involved. If we assess investment performance over one day it can be considered to be pure luck, but as we extend the period skill can exert more of an influence.

Performance chasing behaviour is, of course, not isolated to our selection of active fund managers.  It is also not entirely driven by outcome bias. This is not to say that outcomes do not matter.  Of course, all investors are seeking better long-term results for their clients. If we want to invest in active managers, we need to think far more about decision quality and process, and far less about yesterday’s performance.

Source: Why Do We Chase Past Performance and What Can We Do About It? By Joe Wiggins

Asset Multiplier Comments:

  • Selecting funds based on past performance is like driving a car by looking in the rear-view mirror. There’s very little correlation between past performance and future returns.
  • The best way to overcome outcome bias is to focus on passive index-linked funds, which remove the variability of performance chasing.
  • If investing in actively managed funds focus on investment thesis and stock selection process rather than past performance.

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.”

 

 

Place your bets wisely!

The vast majority of people have no edge over others in the stock market. Even professional fund managers who have demonstrated skill in picking stocks in the past struggle to beat the market once their high costs are taken into account.

The way of the Rational Investor– Keeping costs low is vital to being a Rational Investor. Since you are not going to outperform the market, it makes no sense to pay a penny more than you have to in order to achieve as close to the market’s return as you can. By keeping costs low, you can end up richer than those who pay a high price to try to beat the market and fail.

Active management comes at a cost– Fees are always important in finance, but even more so for the Rational Investor.  Paying initial fees just to get into an active fund is becoming a thing of the past, but you might still save another 2% a year by investing in an index tracking fund, compared to an active one. If a 2% annual saving does not seem like a lot to you, then you’re forgetting the power of compounding returns. If you think you have great edge in the market and you could easily make up this 1.5% to 2% annual cost difference by picking stocks or choosing superior active fund managers or timing the markets or whatever other approach you take, then good luck to you. All the odds and evidence are against you. If you don’t have an edge, then the sooner you get out of the expensive investment approaches and into cheap index tracking products, the better off you will be.

How to get an active manager’s sports car– Conversely, consider the 85-90% of investors who invest in active managers as opposed to index tracking funds, either directly or via their pension funds. Over the long run only a very small percentage of investors who take the active approach will be lucky enough to invest with managers that give better returns after fees. The rest have simply paid a staggering amount of money to the financial industry over their investment lives, and will have less money in retirement as a result.

Passive investing requires patience– The key to reaping the greatest savings is to have the patience for the compounding impact of the lower expenses to take effect. It is like making money while you sleep; lower fees make a little bit of money, all the time.In the early years you can barely see the difference between the active and index tracking investment approaches. In the later years the benefits are obvious – but they are only there for the investor who kept his or her discipline with lower fees.

Ignore the siren songs of sexy managers– you must remember it will take discipline to stick to this approach. The index tracker will perform slightly better over the long-term than the average active fund, and that outperformance will come from the cumulative advantage of lower fees. Meanwhile the many active funds out there will be all over the map, the best performers will try to scream the loudest about how their special angle or edge has ensured their amazing returns that year. We might even be tempted to believe these managers and abandon our boring and average index tracking strategy. But please stick to your index investing plans unless you can clearly explain to yourself why you have edge. The chances are you don’t, and you will be wealthier in the long run from acknowledging this.

Source: The cost of active fund management published on Monevator

Asset Multiplier comments:

  • The most underutilised investment skill is patience, but it can be developed.
  • Fund outperformance is unpredictable, and forecasting a successful mutual fund may be difficult. An additional savings of 2% (of management fees) put in a low-cost passive route may be a better decision for an investor.
  • The gap between price and value, often known as the margin of safety, protects an investor from unanticipated occurrences and allows him or her to obtain extra profits in the absence of such events.

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.”

 

Government’s focus on infra to invigorate strength of the economy

A key goal of the budget CY22 is in the execution of the Capex plan and crowding in private investment. The budget aims to stimulate the economy by beefing up public investments, creating demand for industrial inputs like cement, steel, and capital goods, and generating jobs. Finance minister Nirmala Sitharaman prioritized growth over fiscal reduction, increasing capital and infrastructure investment. In FY23, capital spending accounts for about 85% of the budget. The fiscal deficit target for FY23 has been set at 6.4 percent, a modest decrease from 6.9 percent in FY22.

The budget proposes a 35.4% increase in Capex, a 15% expansion of the national highways network with the addition of 25,000 km of roads, the development of four multimodal logistics parks in the coming year, a focus on electric vehicle (EV) charging infrastructure, and a new battery swapping policy. It also suggested a 7.5% customs tax decrease for all project capital goods imports over time, as well as a budget commitment of Rs 19.5 bn for the production-linked incentive (PLI) plan for polysilicon solar module manufacturing. The divestment target is reasonable at Rs. 68 bn in FY23, down from Rs. 78 bn in FY22. The initial public offering (IPO) of LIC, which is expected in March 2022, will meet this divestment goal. The government intends to sell a 5% stake in the company to raise Rs. 75 bn, with considerable demand, predicted from both retail and institutional investors. LIC IPO is not only expected to facilitate the huge influx of retail investors into the Indian equity markets but also expected to reduce the money flows in different sectors.

The FED’s liquidity normalization initiative has gained traction and market interest rates have risen as a result of this. This is projected to normalize the returns from different asset classes, including equities. The Indian equity market saw exit by the foreign institutional investors in the last few months, mainly because the US has entered a phase of aggressive liquidity normalization and rising interest rates. It is the high rate of economic growth and the accompanying high level of inflation that has led to the policy modifications in the US. However, the government’s private investment policy encounters a significant hurdle a massive tightening of borrowing costs in the economy. The expectation was that the RBI will keep its accommodative policy stance until the economy is fully recovered. With the budget announcement, however, the RBI is expected to hike its policy rates.

As the liquidity reduces, financing large deficits becomes difficult in rising interest rates scenario which dampens the returns from equities. We believe that sectors such as defense (which has been allocated 13.3% of the total budget with a focus on indigenization), infrastructure, metals, cement, and ancillaries are expected to remain in the spotlight with a particular emphasis on firms with low PE multiples.

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.”

Don’t cut it too fine!!

Intelligent investing rests on three tenets- Anand Sridharan reminds investors that intrinsic business value, Margin of safety and Mr Market are three tenets that matter. If we truly understand the essence of Ben Graham’s three tenets, we’re done. There’s nothing else to sensible investing. View stock as a business. Roughly gauge what it’s worth. Since world is all messy, don’t cut it too fine. Keep some cushion. View nutty counterparties as entertainment, unless they offer something actionable based on the above.

Two tenets – intrinsic business value & margin of safety – are inseparable. It wouldn’t even occur to Mr Sridharan to ask the question “What’s the value of this business?”. The actual question that he asks is “Around what buy-price am I fairly sure that I’m getting a decent deal?. The second question blends intrinsic business value and margin of safety to help me reach an actionable decision. My guesstimate of business value will have wide error bars. The range maybe 100 to 150. Whatever be that number, I never do an artificial separation of value and safety margin. At all times, prudent investors don’t fuss about intrinsic business value, apart from being cognizant of a broad range that’s reasonable for a particular business.

This is why simple works better than sophisticated. In any real-world, reliable sense, DCF is nonsense. It is a sophisticated tool for impostors to delude themselves and others. We suck at forecasting and have no way to reduce risk to a number. A mental model that integrates margin of safety and intrinsic business value nudges us to focus on being roughly right, not precisely wrong. It is why the best investors spend a lot of time ensuring that businesses are predictable, and little time making actual predictions. Simple valuation methods suffice for businesses where cashflows and risks are relatively knowable.

Ongoing charade is even more flawed than it seems – What’s helpful to practitioners is a buy-price that offers reasonable certainty of getting more than what we pay for. This goal is achieved through a mindset that views value and safety in unison. Investors get habituated to methods that yield neither value nor safety without such a mindset.

Source- Buggy Humans in a Messy world by Anand Sridharan

AM Comments: –

  • It is tough to establish the true value of a firm. Each investor has their own method of estimating value, which may or may not be reliable. Because intrinsic worth is subjective, it should be assigned a range rather than a single figure. An approximate estimate, say within 10% of the actual value, should be enough. This gives the investor the opportunity to investigate the more subjective components of the valuation process.
  • Investing is done after a thorough examination of the firm and its cashflows, assuring a healthy margin of safety and a reasonable return. Investors don’t have to aim for perfection all of the time. Because we cannot precisely forecast the worth of a firm in the future and discount it at a suitable discount rate, investors must be comfortable with their purchase price.
  • Market frenzy is characterized by heightened emotions. Prices are at an all-time high. As a result, recalling Mr. Howard Marks, one should resist the temptation of participating in a market frenzy.

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.”

 

#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.

 

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