You would not be reading this if you did not want to improve your investing results. Provided that you already have a rational investing philosophy, the key to improving your results lies in improving your investment process.
One thing I have learned in studying the great investors is that they all have a great investment process that drives everything they do.
There’s no secret formula. No valuation algorithms hidden away in Omaha. No short cuts. You need to create a solid investment process based on a rational investing philosophy that has been proven to generate market-beating results.
I think of value investing as quite a contrary approach, almost by definition. It’s almost always a very few people who can be the real value investors because, by definition, it is a strategy that is different from everyone else’s.
People have a difficult time taking the long-term view. Human nature hasn’t changed, and people want to do well in the short term and make money as fast as possible. They can’t handle fluctuations. So if people buy something at US$10 and it goes to US$7 or US$8 or US$5, they think they have made a mistake and they want to sell. They can’t look through that to the long term, which, of course, was Ben Graham’s great contribution.
The goal of studying highly successful long-term investments of the past is to develop a framework for trying to identify stocks that, hopefully, will have similar characteristics when we buy them, and after we have bought them. As Warren Buffett has said, “The investor of today does not profit from the growth of the past.” As Mr. Buffett has also observed, if this were not the case, the average librarian would be rich from the stock market. We also want to try to avoid stocks that will have the future characteristics of the worst performing stocks of the past. It is always easier to find (or avoid) something if you know what to look for.
In May, I observed in “How Quickly They Forget” that investors had returned to pro-risk behavior despite the lingering presence of significant macro worries. And then just three months later, a number of exogenous events caused the markets to undergo a significant decline and one of the greatest paroxysms of volatility ever seen. All of the reasons existed well before. Investors simply hadn’t taken them to heart.
I never cease to marvel, and complain, about the way investors flip-flop – focusing on just the positives at one moment and just the negatives at another – and the speed at which they do it. But I learned long ago not to be surprised by this phenomenon or expect it to stop occurring, but instead to look past the market’s behavior and assess the underlying realities. Thus I decided to take the occasion of my summer vacation to write a memo parsing the recent events and touching on the outlook.
Lately I’ve been getting this nagging feeling that everything I touch turns to dirt. Every time I buy a stock that is already down a lot, the one that my analysis leads me to believe is cheaper than dirt, it declines more. Did I completely lose my ability to value stocks? Did I start ignoring Will Rogers’ advice to buy stocks that go up, and if they don’t go up, don’t buy them?
No, I didn’t get dumber, and my stock-picking skills haven’t diminished. I was simply a willing participant in the latest cyclical bear market. Bear markets make you feel dumber than you are, the same way bull markets make you feel smarter than you are.
Source: http://contrarianedge.com/