Equity Advisory
Are you looking for an honest, transparent and independent equity research and advisory? www.intelsense.in is run by Abhishek Basumallick for retail investors. Subscribe for long term wealth creation.
There are two essential ingredients for profit in a declining market: you have to have a view on intrinsic value, and you have to hold that belief strongly enough to be able to hang in and buy as price decline suggests you are wrong. Oh yes, there's a third:you have to be right.
This will only come from experience of being right about your view.
For a value investor, price has to be the starting point. It has been demonstrated time and time again that no asset is so good that it can't become a bad investment if bought at too high a price. And there are a few assets so bad that they can't be a good investment when bought cheap enough.
There's no such thing as a good or bad idea regardless of price!
This is a critical point that people miss in their quest for "quality" stocks!! **Quality is not irrespective of price.**
Investing is a popularity content, and most dangerous thing is to buy something at the peak of popularity. At that point, all favourable facts and opinions are already factored into its price, and no new buyers are left to emerge.
There is no easy way of identifying when the peak of popularity is reached. But one should have a general sense of when prices have gone up way beyond their worth. And then the trick is to have the emotional fortitude of getting out of the position.
The safest and potentially mist profitable thing to do is to buy something when no one likes it. Given time, it's popularity, and thus it's price, can only go one way: up.
This requires a certain mindset of contrarianism and ability to sit through extended period of non-performance of stock price. This may specially be difficult when other stocks are running up consistently.
Since other investors may be smart,
well-informed and highly computerized, you must find and edge they don't
have. You must think of something they haven't thought of, see things
they missed bring insight they don't possess. You have to react
differently and behave differently.
Out of the main four edges that an investor can have, namely i)
information, ii) analytical, iii) knowledge and iv) time, here Marks is
talking about the analytical or insights edge. With the same set of
information, can you have better or different insights which will result in a differentiated result for your portfolio.
To achieve superior investment results, you have to nonconsensus views regarding value, and they have to be accurate.
For your performance to diverge from the the norm, your expectations -
and thus your portfolio - have to diverge from the norm, and you have
to be more right than the consensus. Different and better: that's a
pretty good description of second-level thinking.
I think this is the simplest yet most overlooked part. You cannot get
superior results by doing what everyone around you is doing. Some
investors I know of surround themselves only with people who have very
similar viewpoints about life and markets. To me, they are living in an echo chamber.
To really have a nonconsensus view, you have to actively look for
disconfirming evidence. That is, an idea which is exactly opposite to
the one you hold.
As Charlie Munger has said, " It's bad to have an opinion that you
are proud of if you can't state the arguments for the other side better
than your opponents."
