“A long-term perspective is required. Yet, the odds are stacked against us!”
It is virtually impossible to predict what the market is going to do.
Investing is simple, but not easy.
The first thing you need to be successful is a long-term perspective, but we, as humans, are not suited to that. We inherited a very short-term point of view from our ancestors.
- We are predisposed to have a short-term outlook.
- In investing, we have to battle our behavioral instincts.
- Daniel Kahneman- Cognitive illusions. We run toward the mirage because we are desperate.
- Henrik Cronqvist and Stephan Siegel found investment biases are inherent, or genetic. You cannot educate them out of the investor-which is scary.
You must value process over outcome.
- Three and five-year periods are the most dangerous thing to look at when evaluating performance.
- We get a different picture when we look at the fullness of time.
- Batting average
- Does this process the manager is using make sense?
Long-term data is ABSOLUTELY essential.
- When you evaluate Buffett’s performance, he has a specific process he does not deviate from.
- If a manager cannot explain their process, it suggests they do not understand what they are doing.
- They say value is dead, but it depends on your definition/use of value.
- If you bring value down to every day experience, it is helpful in picking stocks. The underlying condition is the same. They are both businesses and will both trade at what the market will bear.
Individual factors move in and out of favor.
- Intellectual property.
- Price-book/ book value.
- Look at multiple valuation factors.
- Whenever a factor is working very well, academics will write papers on it. At that point, that factor is peaking and will (probably) soon move out of favor.
Combining factors gives a better signal.
Four of our firm’s multi-factor composites:
- Value
- Financial strength
- Earnings Quality
- Earnings Growth
Also ask, are there reasons I shouldn’t own this company?
Shareholder yield (Dividend yield + Buyback Yield)
Apple (AAPL, Financial) is doing buybacks, which has received some criticism. But buybacks could be beneficial for the company/ shareholders.
Companies returning capital to shareholders historically outperform.
In contrast, expansions and acquisition can worsen performance.
People like to talk about things without giving any proof. But do we take them seriously?
Consistency of returns: Shareholder yield.
Successful active investors generally ignore forecasts and predictions.
Everybody loves forecasts. “So what do you think about the market for the rest of the year?”
A super power for a good investor to answering unpredictable questions: “I don’t know.”
Charlie Munger (Trades, Portfolio): “I don't use formal projections. I don't let people do them for me because I don't like throwing up on the desk.”
Successful active investors are patient and persistent.
Warren Buffett (Trades, Portfolio) is the model of patience and persistence.
Buffett’s SEO algorithm:
- Recognizable brands with a wide market.
- Simple, easy to understand products and services.
- Consistent, solid earning over a long time period.
- Low and manageable debt.
- Good ROE and other solid ratios.
CXO Advisory Group tracked the results of a number of predictions from different gurus between 1998 and 2012. The average of accuracy (47%) was lower than flipping a coin.
The (only) 5 fears we all share: (according to a March 2012 Psychology Today article.)
- Extinction.
- Mutilation.
- Loss of autonomy.
- Separation.
- Ego-death.
Think about that last one. You stick with a stock that is being pummeled. Your friends and family question your decision, which makes you question yourself. Then, you can’t take it any more and sell out.
Mother Nature made us to survive in the short term, which does not work for long-term investing. Long-term investors don’t comply with nature, they defy it.
The “so what”: if you can incorporate these traits into your process, you will likely do very well in the marketplace.
Personal experience is also important to growing as an investor. Wisdom comes from doing. You can teach all you want, but the best knowledge is from first-hand experience.
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