Warren Buffett summarises investing (which I contrasted with speculation in the last post) rather eloquently. This direct quote sums up the best way to compound money at a decent rate over a long period of time: "Your goal as an investor should be simply to purchase, at a rational price, a part interest in an easily understood business whose earning’s are virtually certain to be materially higher, five, ten and twenty years from now. Overtime, you will find only a few companies that meet those standards – so when you see one that qualifies, you should buy a meaningful amount of stock."
The above is really something that you can remind yourself of time and again. The amount of patience needed to just sit there holding on to shares in wonderful businesses is a vanishingly rare skill (and one that is hard to recognise in others, and even harder to practice in a professional investing role). I wish I could say that I find it easy, but the truth is that in an environment filled with daily news, second-by-second price quotations and populated by well spoken men (they are almost always men) with convincing stories about which way a price will move next (therefore providing easy-wins), it is harder still to stay true to the above goals.
As for my future as an investor, I have to admit that even with limited trading activity in my portfolio, I find thinking about it a distraction from my work, which at the moment is paying the bills and providing the foundations for potentially starting a family (a position fairly far removed from the first blog post in December 2008 when I moved to Chamonix on my own). My job at the moment is to provide investors with plausible stories on why they should act. What they should do is listen to Buffett and sit on part-ownership stakes in wonderful businesses. But what a person should do and what they actually do are not always the same thing. As a stockbroker my job is to feed their hunger for ideas/action with investment analysis packaged into a neat stories for bite-sized consumption.
Perhaps I'll switch to an investment role soon, and try my best to apply the skills I've learned and create an environment where my patience can be tested on the coalface of a professional investment mandate. I realise 20% a year is vanishingly difficult in an institutional world, but I do hope that if I'm given the chance, I'll be able to generate returns that are at least in excess of those of a passive index tracker over a long period of time. The power of compounding is still somewhat compelling with 7% annualised returns, whilst it becomes absolutely startling with 23.5% annualised returns (7% doubles your money in 10 years, 23.5% takes it up 8-fold over the same period).
To drill in the above point of Buffett's, and to point out the chief mistake of most investors is the same thing. To have startling returns you don't buy something at 10% or 20% less than it's worth, you buy it for 50% less than it's worth. It's just that simple. Holding cash at the moment is probably the best strategy as there's little obvious value out there and confidence is relatively high versus the past few years. And this is where the patience comes in. The confidence that something will come along eventually that is materially mispriced is what you need in order to hold cash and forgo the last few percentage points of the bull-market's gains.
Nobody can time markets, but everyone who is worth their salt can tell if a stock is compellingly cheap or not. If there's nothing to do, do nothing. Only professional investors are required to remain fully invested at all times. For the private holders of wealth, who can act in a contrarian manner, cash can be a wonderful investment as it offers the holder the option to pay what may be compellingly lower prices in the future for a given stock. And when dealing with a manic depressive business partner (an apt description of Graham's 'Mr Market'), it will often pay to wait for a bout of depressive behaviour before parting with cash for a part-share in the many wonderful businesses for which he quotes prices daily.
It may be that this is the last post here, given I really should focus more on paid sources of income, and less on compounding returns on just my own capital (as fun as the outcomes of the latter when it works may be). I hope that anyone reading this will have a sense that it is not impossible to beat markets over time, but also that an investor's chief enemy in doing so will, in fact, be themselves. Human beings have brains so well adapted to running and hunting in the savannah that they have trouble with the complexities of investment analysis and staying rational where money and risk (and therefore emotions) come to the fore.
The one certainty an investor (even one who is doing it right) can have is that they will make mistakes. But for those who persevere with it anyway (probably because they love the process and the constant sources of opportunities to learn and improve) the rewards - both material and psychic - come highly recommended.
It may be that this is the last post here, given I really should focus more on paid sources of income, and less on compounding returns on just my own capital (as fun as the outcomes of the latter when it works may be). I hope that anyone reading this will have a sense that it is not impossible to beat markets over time, but also that an investor's chief enemy in doing so will, in fact, be themselves. Human beings have brains so well adapted to running and hunting in the savannah that they have trouble with the complexities of investment analysis and staying rational where money and risk (and therefore emotions) come to the fore.
The one certainty an investor (even one who is doing it right) can have is that they will make mistakes. But for those who persevere with it anyway (probably because they love the process and the constant sources of opportunities to learn and improve) the rewards - both material and psychic - come highly recommended.
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