Being a contrarian investor is a no-brainer for many of the world’s top investors. It’s just the nature of the business. But being a contrarian isn’t always a good idea, nor is it always necessary in order to be a successful investor.Continue reading “When it’s raining, buy suncream”
I came across a new book the other day called Repeatability by Chris Zook and James Allen of Bain & Company. Although the book is about building enduring businesses that can cope with constant change, what struck me was how applicable some of the ideas were to investing.
Three ideas are particularly relevant as key pillars of a sound investment strategy:
It’s important for a business to differentiate itself from the competition, but this idea also applies to many of the most successful investors. It’s hard to beat the market if you’re doing exactly the same as everyone else.
With value investing, being different is a core part of the philosophy. Simply by buying those stocks that are relatively cheap, you are almost guaranteeing that what you’re doing is different from everybody else. Of course, there are lots of value investors out there, but compared to the total population of investors, we’re a tiny minority.
Keep it simple
If knowing the ins and outs of a business, its industry and the wider economy were the most important aspects of investing, then CEOs and managers would be the best investors in the world; but they’re not.
One reason for this is that no matter how much you know about a company, its competitors, industry and the economy, there will always be far more that you don’t know – most of which you don’t know that you don’t know.
This is sometimes called the illusion of knowledge, the idea that if we know more about something, then we can make better decisions. Sadly, this isn’t always true. In many situations, there are perhaps only 10 or 20 pieces of information which dominate the subsequent outcomes, and the other few hundred pieces of information that you thought might be important turn out to have little or no impact.
Even on the occasions when some obscure bit of data does matter, the timing and magnitude of the effects are usually unpredictable, which renders the additional information useless anyway.
The trick here is to know which pieces of information have the most impact most of the time, both in terms of the company’s prospects and, more importantly, on the investor’s total returns.
Make it repeatable
It’s not enough to be a contrarian (implicitly or explicitly) with a simple core process which focuses on the most important drivers of equity returns. If the process is applied in an ad hoc manner by an investor who makes it up as they go along (perhaps using different financial ratios depending on how they feel that week), then there may be trouble ahead.
Companies which succeed are often those which have systems which they’ve really nailed down over the years and that can be applied to new stores or factories or new markets and countries quickly and accurately with maximum impact.
The same applies to investing strategies.
Those strategies which are successful are often the ones that have been written down and refined over time, perhaps into an investment checklist with all the critical go/no go decisions in place so that nothing is missed and every lesson learned is built back into the system.
So whether you’re building your own investment strategy or judging the approach of someone else, remember to think about how it’s differentiated, whether it’s relatively simple and whether it can be repeated accurately, over and over, year after year.
Like most long-term projects, it’s important to have sensible goals when investing so that you have a final destination in mind at all times.Continue reading “How to set and use investment goals”
Ben Graham may not have invented the term ‘margin of safety’, but he did popularise it for investors by making it a core part of his investment philosophy. But what exactly does a margin of safety mean when it’s applied to investing, and how can you go about finding it?Continue reading “3 Ways to find a margin of safety”
A long-time reader recently asked:
Once an investor has a strategy, how can he develop his potential? What should he be reading, or doing? Once you have a screen with certain criteria, then what? Its in our nature to fiddle, to feel like we are doing something, so what should an investor do to develop his potential further?
This is a great question that almost answers itself. It gets to the heart of the problem that many active investors have, and that’s the idea that they always have to be doing something.Continue reading “How to become an even better investor”
I’ve recently started re-reading the long collection of memos from the chairman of Oaktree Capital, Howard Marks. I didn’t get very far (halfway through the first memo from 1990) before reading something so important that I had to turn it into this editorial.Continue reading “Beating the market – You don’t have to swing for the fences”
The overall process of investing is simple: Buy – Hold – Sell. Unless you’re a buy-and-forget investor, it makes sense to periodically check on the difference between the price of your investment and your estimation of its intrinsic value.Continue reading “BAE Systems – How to re-value a company you already own”
I must be getting old. In fact, having recently turned 40, I have hard proof that I am (in the shape of the cards, socks and pants that I received). It’s not turning 40 that’s making me feel like an old curmudgeon, though, it’s my approach to risk.Continue reading “Does Size Matter in Investing?”
When I started out as a value investor my original plan was to hold 10 companies. I thought that this would be enough diversification to reduce volatility by a sufficient amount such that I would be able to sleep well enough to stick with the investment program.Continue reading “How Much Diversification Is Enough?”
It’s that time of year again when everything starts to slow down in preparation for some excessive consumption of mince pies and all things tasty and fattening.Continue reading “Merry Christmas 2011”
Having share prices in your face 24/7 is like having a giant red sign on top of your house constantly flashing the price that everyone else (on average) thinks your house is worth.Continue reading “Why Stock Tickers Are Bad For Your Wealth”
I’ve made my fair share of investing mistakes and I’m sure that, despite my best efforts, I’ll continue to make them. The trick is to be honest with yourself and learn from them and learn to recognise them before you make the same ones again. For me, the biggest offender is overconfidence.Continue reading “Tips for Overcoming Overconfidence”
To most value investors, debt is one of the first things they look at when analysing a company. Since value investing, almost by definition, involves buying unpopular stocks, there is often some kind of bad news surrounding the company which will only be made worse by high levels of debt.Continue reading “5 Ways to Measure Debt”
One of my favourite value investing sites is The Value Perspective which is the web outlet for some of the (value) fund managers over at Schroders. In their latest piece, Andrew Lyddon talks about how the telecoms sector is not exactly a hot favourite. Despite the sector’s deserved reputation as a defensive play, share prices often fell and lagged far behind the wider market and even other defensive sectors.Continue reading “Why A Falling Share Price Is Often A Good Thing”