November 28, 2007

Investment Beliefs

In this post I want to share with you some investing policies, if I may say, that I adhere to, I try to anyways. These policies, protocols or wisdom, whatever you may want to call it, is a foundation of my investment process, in addition to analysis methodology and investment process and procedures, more on those later.

This list is not an absolute list, but it is what suits me and suits my personality and my goal of being long term capital appreciation. You should always find something that suits you and not work in an opposite way to your natural intuition and thinking, so use this and try to develop one of your own. These beliefs or lessons, I hope, will keep you from making a big mistake, although I will always will make mistakes and I accept that. But to do well in investment I hope I can achieve with this list 1. consistency and 2. avoiding big pitfalls.

I have compiled this list from reading Warren Buffet shareholders letters and reading other famous investor philosophies. Also, I have learnt from some of the mistakes that I have done in the past, so this list will be always a work in progress.

  1. "Investing is where you find a few great companies and then sit on your ass" - Charlie Munger
    Invest for the long term. Most billionaire investors held their positions for multi year holding period.
  2. Invest in the same way as you buy anything in life, your house, car...etc, research and look for a quality item and then find a good price to buy it. Buffet looks for companies with solid financial performance managed by seasoned and savvy executives and have strong competitive advantages.
  3. Invest against the common trend. Significant opportunities arise when things are negative. This is where great value investments can be made. Ignore other people fear of losses. Buy When no one will — The big players on Wall Street are very short-term focused. They’ll often dump stocks just for missing one earnings estimate. Fear motivate their selling decision and not logical thinking. But investors who favor a longer-term view can find hidden value in stocks that may be down as much as 30%, based on small news items and diligent research.
  4. Investment is about a process, find one and stick to it, deviation means losses because it means you acted on emotion and not on a logical analysis.
  5. Beware of the "value trap" —Don’t be fooled by judging stocks on price alone. Just because a former high-flying stock is selling for half-price doesn’t mean it’s a good value. The stock may have much farther to fall and may never recover. Without knowing its intrinsic value, or possible catalysts for turnaround, you can’t know if a low price is a good value or not. (hope is not a strategy)
  6. Know the True Value —Price is what you pay, value is what you get. Cash flow is the real health of the business. As Buffet says, “Intrinsic value can be defined simply: It is the discounted value of the cash that can be taken out of a business during its remaining life.” Discounted Cash Flow (DCF) is a powerful tool to help you know whether to buy, hold, or sell. (We offer our subscribers a unique DCF calculator on our website that makes this simple to do.)
  7. Tune out TV analysts recommendations and never buy a stock at analyst recommendations alone as their motivation for a recommendation may not be in your best interest. Never buy on another person recommendation or analysis, even though they may have a solid argument, because you will not know when should you sell.
  8. Never buy a stock at its 52 week high price to avoid getting caught in making an emotional decision.
  9. "When the neighbours tell me what to buy, and I wish I had taken their advice, it's a sure sign that the market has reached a top and is due for a tumble" peter lynch, one-time mutual-fund manager for fidelity investments, the world's largest fund company.
    When press or the average Joe start talking about an investing theme, like technology, China, India, do not bother investing in said themes as it reached a mania level.
  10. Look for the right information. People think information is going to take them over the top. But it's not information that helps them; it's wisdom. It's the ability to measure the information, to give it the proper weighting and to think through the big picture. I think you can really see that people need to learn more about themselves. That constant availability of information, if anything, all of that can be more damaging. How can more information be bad? People who get so close to their investing tend not to do very well. You show me someone who looks at their stock every day and I'll show you someone headed toward trouble.
  11. Never become too positive or too negative in the markets. In the longer term, assume asset appreciate will always revert to the mean.
  12. It is OK to do nothing. I do not feel obligated to invest in any idea I am fine with doing nothing.

1 comment:

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