I have been reading about Value Investing for about 8 years now, and with risking that you may doubt my credibility to write on this website, I would say that finally, it has started sinking in me. It took long because I had to unlearn a lot to learning value investing.
It really tested what I had experienced and thought to be true as it was easy to do, but to Learn Value Investing and apply in your investments (and advisory, in my case), is like cutting a tree daily when you have gas at home. But it was worth.
The books I mentioned about value investing are very difficult reads but finally, after constant endeavors only, they will start talking to you.
The Initial Reaction when you start Learning Value Investing
When a lot of people first start to read & learn about investing they invariably end up reading about Buffettology or the sermons which mostly say “don’t do it” “refrain” or “beware of “. In their first few weeks of reading it looks like a guidebook and you think a manual is in your hand and you can just take a plunge.
From there onwards begins this fairy tale dream ride starts that someday they can also invest like Warren Buffett or Peter Lynch. The next logical & automatic step that people tend to take is to read what any other fund manager worth their capability has to say about these successful value investors.
After having read & being enamored with biographies and white washed with the performance & their dazzlingly simple explanation of how they analyze businesses, people start with the notion that investing is an easy affair.
The problem starts here
By this time, they started getting dreams (often during the day) of activity of really sitting through an entire market cycle not being able to find great investment opportunities or even spending huge amounts of time & effort in researching industries.
The problem with a beginner learning to invest is that we tend to immediately get sucked into the investing blog world which speaks majorly about success only. In this world, a lot of people are doing original research and testing their own ideas while a lot are just pretending to learn value investing. They are just ‘’me too’’ people who are constantly following Rakesh Jhunjhunwala or Dolly Khanna Portfolio on blogs.
They will download factsheets from fund websites and try to guess what star fund managers are doing. Not enough effort is spent to understand why investing is important & what are their unique need to invest.
Value Investing is Look Self – Not Look At Billionaires
People rarely do any cash flow analysis of their own life & are massively unaware of their own patterns of spending & allocating money on non-desirable things.
They do not think of past mistakes as experience. People automatically assume that they will somehow have enough money by the end of the year to put into some tax saving government scheme. And, if the mood is liberal they will call the “parasite for generation” LIC agent and make him happy.
They are happy with 8% ‘’Tax-free’’ compounding of the PPF or 5% “Tax-free” returns of insurance money backs (Read money bitches).
What they forget or ignore is any person who wishes to take charge of their investments & wants to compound their saving at a rate of at least 5% more than the inflation rate has no other legal option but to invest in stocks.
Investing in stocks, especially from a background like this is going to be a tremendously difficult task. By this time each new value investor or fund manager we read about, we start to feel like we can mimic his/her style of investing.
They think attending meetings when these investors speak or to watch them on TV, laying out their ideas & explain their thought process they can get a clue of what that investor/fund manager is doing. Using these ideas as a blind entry point can prove to be fatal. It is equivalent to following trading tips from public investment forums or your local broker.
Why you cannot replicate a Succesful Investor or a Fund Manager
It may look simple and harmless following a fund managers ideas & invest style. It seems easy & replicable to do. On the contrary, it is the most difficult thing to do. This is because these professional investors discuss ideas with a time lag. Either they are referring to future with a lot of other assumptions to happen in meanwhile or past where the match has already ended.
A lot might have changed from the time they have invested in that idea & by the time we get to read, hear about it. Instead, the best way to learn from someone else’s idea is to use it as a first filter. This way we can get only the investment idea from some these professional investors. Then we can start doing our own research in order to learn about the business & industry better. Sadly, this rarely happens, unless the investor genuinely cares to learn value investing.
If you’re not researching on your Own – You are a Loser
Relying on or following professional investor’s style without own research backing has two other drawbacks.
First, we become just followers. We never get to learn and develop our own style of investing is. How much risk we can tolerate with our own money on the table. We always assume that risk is all same. Someone else’s exposure of risk is also applicable to us. But we have our own unique set of money-related behavior, cash flow needs and contingent needs. These may not be applicable for a professional investor as his full-time occupation is fund management. So it makes more sense to learn about how we need & use cash to plan our investment accordingly.
Second, blindly following someone else deteriorates our own ability to learn. Copying and applying other investor’s style has been discussed by legendary value investor Mohnish Pabrai. He does it himself. But what we do is burn endless midnight lamps to considered the idea and then going into reverse engineering the idea & finding out details on our own to validate it. But what we do is we follow and convince ourselves that the value investor has already done the required study. Why should we again do it when the result of the research would be same. With our lack of willingness to learn about the business, especially after it has been endorsed by a reputed fund manager/investor, we can never hope to be good to critically analyze a business.
Finally learning to invest on our own has some great advantages. Apart from getting to know our own investing style, we get to know a lot about our own psychology. Psychology plays an important role in learning Value Investing. We start observing ourselves & self-responses.
We realize what situations make us feel afraid or what events make us feel greedy. What we need is to learn the skill of patient investing and restraining mistakes that are behavioral in nature.
In the book F-Wall Street by Joel Ponzio, he professes this list of 9 commandments for value investing:
- Never invest in anything you do not understand. Take an effort to learn the business than buying.
- Price follows value over the long. So look for value when the price is turbulent. Don’t make hasty decisions based on price only.
- Price volatility does not imply any additional or reduced risk; the risk is the price you pay & your evaluation of the opportunity.
- The stock market is a place to buy & sell businesses, regardless of the myriad of other (or fester) ways to make or lose money in stocks
- Earnings are for the income tax department & accountants; business owners & silent partners rely on Cash Flow.
- A great business is one that will survive the bad times, wait for the bad times to invest in great businesses.
- Unless it affects the business of your company or it is filed with exchanges, it’s just noise. Analyst opinions and generals market trends tend to affect the business of your company.
- He who turns over the most rocks wins – hard work pays
- If you don’t have a margin of safety, you don’t have a good opportunity- risk is calculable and can be minimized or eliminated.
So make a new investor of yourself – a more hard working, patient value investor.
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