I started by “investing” career by trading penny stocks, then learned the ropes to technical analysis. In college, I used technical analysis to trade forex and write code that would execute trades on my behalf when it noticed certain technical patterns. I also had my fair share with trading options. Even though I might have joined the dark side of technical analysis, I was actually always a fundamental analyst. I knew that every time I performed technical analysis, I was speculating because I was betting that the herd had the same mentality as me. In short, I was and have been a value investor at heart. In this week’s blog post, I will talk about 10 things that I have learned from value investing.
- Patience. Trust your theory and let it play out. Like Warren Buffett says, “The stock market is a device for transferring money from the impatient to the patient”. If your analysis is right, and your assumptions do not change, then all you need to do is just hold on to your investment. Be patient, and the magic of compounding will be take over.
- Never lose money. Just because there is a hot tip and everyone is investing in a certain security does not mean you have to follow the herd. Charlie Munger talked about the “social proof tendency” bias, which is an automatic tendency to think and act as others around think and act. As a value investor, conservation of principal is the ultimate goal. It is important to block out the outside noise.
- Be greedy when others are fearful, and be fearful when others are greedy. You should be fine to hold on to cash if you cannot find a sure investment. Just because your friend or neighbor is making a lot of money from the stock market, it doesn’t mean that it is safe for you to start trading. This concept is much harder than it looks simply because we have the envy/jealousy tendency; Envy/jealousy comes from the desire to have a quality, possession, or attribute belonging to someone else. It is important to understand this bias, and that it can help being a contrarian at times.
- You are right because your data and reasoning are right. It is important to keep emotions at bay. There is a peace of mind that comes along with being a value investor. The market fluctuations do not affect you or your sanity anymore. The markets could close tomorrow, but I know that the securities I hold will be just fine even though they won’t be constantly quoted on the market.
- Fundamentals is what drives the business growth and eventually the stock price. You could look at a chart and be amazed by how much a stock’s price has increased, but if the stock’s fundamentals have not grown along with the price movement, then the stock price is bound to have a correction at some point.
- Be aware of the cognitive biases and common human misjudgments. From time to time, I would listen to Charlie Munger’s speech on the psychology of human misjudgment, where he outlines 25 cognitive biases. It helps me ensure that I am not making any biased decision.
- It is fine to overpay a little right now, if the company has tremendous potential in the long run. In other words, buying a company with a P/E of 25 and a long runway ahead is ALWAYS better than buying a company with P/E of 8 with marginal growth prospects.
- When you buy a stock, you are the owner of that company. The management is there to make you money. Know the management before investing in the company.
- Always have a good cash reserve. You never know when opportunities might arise. However, be willing to strike hard when the correct investment opportunity shows up. Charlie Munger once said, “it takes character to sit there with all that cash and do nothing. I didn’t get to where I am by going after mediocre opportunities”.
- Small cap stocks are like acorns, which can grow and become giant oak trees. A blue chip or a large cap stock is already an oak tree, so your returns, although predictable, are limited. If you are looking for a 100 bagger, then such a return is most likely to come from a small cap stock.
Hope you learned a little and found this blog post helpful. We talked 10 things that value investing has taught me – Patience; Never lose money; Be greedy when others are fearful and be fearful when others are greedy; You are right because your data and reasoning are right; Fundamentals is what drives the business growth and eventually the stock price; Be aware of the cognitive biases and common human misjudgments; It is fine to overpay a little right now; When you buy a stock, you are the owner of the company; Always have a good cash reserve; Small cap stocks are like acorns. As always, you can sign up for our free mailing list here. You can sign up for our paid subscription services here. Like us on our Facebook page here. Thank you!
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