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“If you can’t convince yourself “When I’m down 25 per cent, I’m a buyer” and banish forever the fatal thought “When I’m down 25 per cent, I’m a seller” then you will never make a decent profit in stocks”
-Peter Lynch-
Before getting to the main course, there is a little update on the website that I would like to bring to your attention.
As I tend to do more company’s deep-dive analysis moving forward, I have created three different categories in the hope that everyone can easily navigate through the blog and pick what interests them.
They are as follows:
Getting Started – I will keep doing bite-sized posts in this category, sharing my thoughts and opinions on investing and finance in general. As I promised, this is going to be for everyone. No finance degree is needed. No prerequisites.
Analysis – where the “good stuff” begins. For those who are interested in analysing companies and insights into my portfolio, this is the place to be. I will share with you everything, from investing philosophy to my views on businesses, how I approach and form an investment thesis, why I buy which stocks, etc. (disclaimers: no financial advice)
Concepts – lessons I learn, new things I discover, and experiences.
So, for the first write-up in the “Analysis”, I would like to walk you through the mindsets I have developed on this investing journey - the ones that I dare say are critically important for all investors out there.
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The first stock I ever bought was the Commonwealth Bank of Australia (ASX: CBA). Being one of the top four banks (if not the biggest) in the country, the name CBA gave me enough conviction to believe it was going to be a good investment.
“It is a big blue-chip stock. I can’t go wrong with it” - I thought.
In addition, the price of the stock seemed to be heading toward its lowest point in five years which opened up a hard-to-pass buying opportunity. After spending some time learning how to read stock charts and their associated indicating patterns, I was confident that I could pick the bottom (buy low sell high if you may). So, I went on to place an order to purchase 6 units of CBA at $69 a piece.
Fast forward to a few weeks later, it was trading at $74. There I was, sitting on the couch, thinking this game of investing was as easy as playing Age of Empires with cheat codes. Waking up every day knowing that your stocks gained a little more in value than the day before was such a nice feeling to have. I was going to sell at $80 to lock in my profits.
“I can do this forever” - I told myself.
Hmm. Too good to be true, isn’t it?
I am pretty sure you can guess what happened next. Your imagination is serving you correctly.
To my surprise, CBA retraced to $73 and dropped to the $70 mark shortly after. Technically speaking, I was not losing any money at that point because I had not yet sold the stock. Had I been a little more patient and rational, things could have turned out differently. But I started to panic. I didn’t know what to do nor could I come up with any explanation for the performance of the stock. Nothing out of those charts and patterns was of good use.
“Why is it still going down?” I kept asking myself.
The only investment thesis I got basically was: “It goes down this much already, it can’t go any lower. It has to shoot up. It has to”. And before I knew it, the fear of losing money kicked in and it led to the decision of selling all out at $69.50. I assured myself it was a good move and that was better to get away with a tiny gain than suffer a loss.
In hindsight, that was clearly not how investing works. If anything, what I did was purely speculating - buying a stock based on the assumption that it would follow a certain moving pattern and waiting for the next person to come along and pay a higher price for it. My entire "research process" came to a halt after one random video I found on YouTube on technical analysis. I did not have any other reason why I bought the stock except for the overly positive illusion I hung onto, convincing myself that it was okay and that this sucker was going up. (Luckily, I was not managing anyone’s money at the time!)
It is actually embarrassing to look back at that moment and try to grasp the incomparable magnitude of my stupidity to think investing was that simple and picking stocks was only a matter of anticipating patterns and trends.
No, it is not easy!
After the “fun” ride with CBA, I decided to give investing another attempt. But of course with a different approach this time.
I started (and still am) accumulating all the investment books I could find. All the classics - Benjamin Graham, Warren Buffett, Peter Lynch, Joel Greenblatt, Seth Klarman, Howard Marks, et all. My bookshelves are filled with their work and wisdom. I have learned a great deal from them more than I can tell.
But every now and then, I come across a couple of great investors who travel a little off the busy roads. And it was John Mihalejevic who taught me that the stock market is a multi-dimensional space. Everyone participating in it is generally interested in the same thing – making money: some are in it to make quick bucks; some just want to camp in there till the end of time; retail versus institutional investors; there are those who want to manipulate the market while others cannot care less what it does; …
Hence, there is no one fool-proof recipe for achieving this rather common desired goal. You can analyse Warren Buffett all you want and copy exactly what he does but as far as I am concerned, only one man has ever truly followed his path and managed to get results as spectacular as his.
John also pointed out that in this business, it is hard enough to succeed as an original; as a copycat, it is virtually impossible. Therefore, each of us, regardless of what our goals and objectives are, must carve out a unique path that leads to investment success - a framework of beliefs and principles of our own.
With that being said, there is one thing that all of the legendary investors have in common - one of the masters’ key mindsets - that underlies their successful investing: they think of stock as small pieces of a business.
I had never looked at stocks this way. For a while, I thought they were just a bunch of goods that you could trade at a Sunday market. An exchange simply was there to provide a convenient means of exchanging your ownership of the goods to the hands of others for cash, just as if you can go on carsales to buy a car. And when you have to constantly worry about the price of something, it is not investing.
It certainly took me a while to realise that behind every stock, there is a company with real assets and a team of people running it, selling real products and providing real services to real customers. Since then, I have never picked another stock. I have bought and invested in businesses that happen to be publicly traded. I have become an owner of the business and do not care whether the market goes up or down the next week or the next month or the next year.
I was blown away when I learned this simple yet bewildering concept that my tiny mind could not seem to comprehend before. I understand now how naive I was when I thought the most important thing was to predict what the stock would do.
However, again, it is never that easy.
More often than not, we are inevitably bombarded with plenty of distractions coming from the crowd that make it easy to forget the essence and importance of business ownership. These include market condition projections by professionals, so-called experts giving price predictions on TV, gloomy economic forecasts, etc.
Therefore, to avoid these distractions, you ought to develop the mentality of a businessperson. By casting yourself into the role of a businessman/woman, you will be able to diverge from the crowd and focus on the only thing that matters: a deep understanding of the business.
In his book Uncommon Stocks and Uncommon Profits, Phil Fisher argued that in order to stay rational and make a good investment decision, investors needed to become fully informed about a business and looked at it holistically, investigated all quantitative and qualitative factors, and assessed its financial position as well as potential growth.
Fisher also reminded us to look beyond the numbers and learn about the business itself, for its underlying economics matters a great deal, as well as the industry in which the company operates, including its competitors.
As Warren Buffett says “When a manager with a reputation for brilliance tackles a business with a reputation for bad economics, the reputation of the business remains intact”.
But that is not to suggest that anyone can run a business. I learned from Fisher that it is necessary to study the quality of the people who run the company, for their abilities could affect the value of the underlying business.
Essentially, when you invest in a business, you handle the money to the executives and directors and ask them to put it to best use in your and the company’s interests. If you follow the words and actions of the management team closely, you will able to pick up things that will assist you in measuring the value that they are adding to the business long before it appears in the company’s financial reports or in business headlines. Doing so will take a bit of work and digging and that may be enough to discourage the weak of the lazy. That is your gain!
Only once I familiarised myself with these important beliefs could I start to appreciate and understand the true act of investing. These two simple yet crucial things have made my life as an investor a lot easier and helped shift my focus to studying and analysing businesses, which I believe is set to do wonders for my journey and the portfolio I am managing.
(to be continued)
Thanks for reading!
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Contact:
admin@oceansidefamilyinvestment.com
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