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Luck and skills
Just think about any activity in life from pure skill with no luck to pure luck with no skill. The latter one is the slot machine, and the former one is to play a chess match or tennis or run a race. And almost everything in life stays in the middle of these two extremes. That’s the idea called the “paradox of skill.” When people compete with one another, the more skillful they are the more uniform their results become – the more luck becomes important.
Systems are all skills don’t really revert to the mean at all. In the running race for example, the fastest will always win. So when there is no luck, there is little mean reversion. But any contribution combines between skills and lucks will make the mean reversion happen.
Mean reversion is hard to implement mostly for psychological reasons. People often get caught up in short-term stats which don’t let us see the whole system.
Valuation
Value is simply the present value of future cash flow, relevant for any financial assets. You don’t know the exact cash flow, expectation approach takes 3 steps:
Step one is starting with the stock price, then reverse to see what has to happen for that stock price to make sense. For example, Cisco at $14/share, what has to happen for its financial performance to make sense? The second thing is to do some research on the financial and the strategic characteristics of that company and ask :” Are they likely to do better, or worse than the market implies”. Finally is to decide to buy, or sell or do nothing.
Right attitude towards investment
For the older investor, let say who’s 60, the recommendation was well said by Jim Grant “Roll back the calendar 30 years, and that’s your best advice. Go back to being 30”.
Warren Buffett has said “Be fearful when others are greedy, and greedy when others are fearful”. It is very difficult to do in terms of human emotions. When everyone’s scared, it is time to load up the truck. But when everybody’s so optimistic about things, it’s when to stay cautious.
In investing, it’s important to step back and ask “What does long-term look like? What do the structural trends look like?”
Due to a decade of a flat stock price, people have been down on the buy-and-hold idea. But it’s not buy and hold that matters, it’s buy cheap and hold.
Here is the full interview at Forbes: here
About the author:
Money manager into global equities, especially with US and Vietnam markets. CFA level 3 candidate. Lecturer for Stalla - CFA course in Vietnam Visit Anh Hoang's Website
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Adding it back...,
after a decade of passive investing in guru mutual funds and a very poor performance, I decided to become active investor some 3-4 years back. I was trying to figure out what I did wrong. I invested in best MFs, did not chase performance, carefully allocated money, rebalanced periodically, did dollar cost average and still failed.
Then some one on this forum pointed out exactly this.
"Due to a decade of a flat stock price, people have been down on the buy-and-hold idea. But it’s not buy and hold that matters, it’s buy cheap and hold."
Probably the most valuable investing lesson I have learned. It was an Aha moment and kick myself moment for not realizing such a simple and obvious thing.