(Note the flair Basics/Getting Started)
(Note: links to the article provided in the comments)
"There are two requirements for success in Wall Street. One, you have to think correctly; and secondly, you have to think independently" — Benjamin Graham, AN HOUR WITH MR. GRAHAM by Hartman L. Butler, Jr., C.F.A
Investing isn’t a group sport where people work together to bring down the woolly mammoth. Investing is an individual activity to avoid being a sucker in a poker game.
Basic stuff on “How to think correctly”
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Do you know what makes stocks go up in the long term ?
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Do you know how to handle market volatility ?
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Do you know when to buy stocks ?
The first two questions can be found in chapter 8 of the book “Intelligent Investor”, titled “The Investor and Market Fluctuations While the last question is best answered in Chapter 20, “Margin of Safety as the Central Concept of Investment”.
Stocks are not just pieces of price quotations but they are about the business. Business results, foremost being earnings, cashflow and revenue are the primary drivers of share price appreciation in the long run.
Market volatility cannot be avoided and is inherent in investing. We should however, use market volatility as an advantage instead of letting it instruct us.
We buy stocks when it is cheaper than our fair value estimate of it. This margin of safety is needed because circumstances could change, or more likely, our fair value calculation is too optimistic. Buying low and selling high should be our objective. Buying high and selling higher, without a safety net is called momentum investing.
(Think of the last 10 years, who could have predicted a boring 2015 to 2019 followed by a world wide pandemic in 2020, high inflation in 2022, a war in Ukraine’s and then a trade war in 2025?)
How to think independently
To think independently is difficult, because we tend to agree with each other in a social setting. And to take an independent position is often seen as an anti-social behaviour.
On a basic level, I think we should be aware of our biases. Instead of talking about FOMO, loss-aversion and shiny objects, let me share with you Robert Cialdini’s six reasons why you could be persuaded to buy a company’s stock. (See the links). His work centres around how are some people persuaded to do something and many of it are unconscious biases. Let me paraphrase it:
I buy this Company’s stock because:
- I like the company. - I have always bought it & it has always gone up. - all my friends are buying the stock. - the expert on tv says to buy the stock. - only this company has this unique product -
I owe you one.
The only point from the six that is not applicable to investing is the last point. The rest can be used to explain why people were crazy two weeks ago about DRAM, last week over MICRON, this week over SPACEX. Come on man, stop being a patsy in a poker game. If you read it in Reddit, it is probably too late to invest in it.
On an advanced level we should also think about contrarian investments. Take the case of turnaround plays (Starbucks, Lulu Lemon, Nike, Disney, Hershey, Pfizer etc).
We know that they are cheap for a reason, the question should be how do you distinguish between a value trap, an investment case or a cigar butt? On what metric do we check to see if the turnaround is underway ?
Turnarounds is just one way to think independently (like Buffett and the Salad Oil scandal which he bought AXP cheap when it was in trouble or GEICO when it almost went bankrupt in the late 1970s). The other obvious way is not to follow what is popular (mag7, ai, rocket, ev, quantum) and to embrace the hidden, the obscure and the unpopular.
Thanks for reading this rant.