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Trusting Your Investments

Trusting Your Investments

Most individuals have pretty flimsy convictions when it comes to investing. Of course, some individuals have a real burning interest in the stock market. They don't think of investing as a foreign science but as something that has direct relevance to the daily actions of people.

However, the rest of the population has acquired its investment views via more passive means. The common pattern is to amass a collection of trite maxims. Similar to how a student might study for an exam, investors construct their opinions. Nothing would be amiss if learning about investments were as easy as competing in a third-grade spelling bee.

Investing, however, is a far more nuanced topic. This is not to suggest, however, that it is an easy one. It may come easily to certain people. However, nothing is ever easy. Investors lack the accuracy and certainty of physicists when it comes to analyzing connections. The investor cares about human phenomena, which are inherently complicated.

The seeming difficulty stems from the subject's intricacy. It is possible to come up with general rules to follow, but it is hard to come up with rules that will work in every situation.

High returns on equity, strong consumer brands, low P/E ratios, low enterprise value to earnings before interest and taxes, high free cash flow margins, and rock solid balance sheets are not enough to support an intellectual structure.

The architect will be devastated when the whole building collapses. Why? Because all of the aforementioned qualities are positive ones, nothing more is needed. In other words, they are not genuine principles. They are faulty even as generalizations. In the end, it's the particulars, not the generalizations, that matter when making investment choices.


Smart thinking and rational consideration are prerequisites for making any financial choice. Get back to fundamental principles. However, moral ideals alone are not sufficient. You are not being asked to define the law; rather, you are being instructed to use the law to resolve the issue at hand.

Many individuals start to feel helpless at this point. They are at a loss as to where to start now that they realize investing is more complicated than ticking off boxes.

The correct approach is to base your work on existing expertise. What do you really believe in first? Put them through a thorough and fair evaluation. Then, and only then, should they be used in the current scenario.

Is the idea of something's "intrinsic worth" something you can get behind? Do you think it's a good example to follow? If so, you should start there. What does it mean to have "intrinsic worth" exactly? If this is true, then what implications does this have?

The most challenging realization you'll have to come to about intrinsic value is that it's possible to overpay for a fantastic company. The dispute may seem easy to settle to some people. For unknown reasons, they have an aversion to high-quality goods.

Many people have a tough time reconciling the seeming contradiction between intrinsic value and investing in fantastic companies. But if you want to trust yourself in the future, you must be open to critically examining your investing assumptions. You must act as your own judge and jury. The evidence contradicting your theory must be presented.

If you aren't prepared to do that, every time you underperform the market, you'll start to doubt the investing convictions you do possess. In the near term, several tried and true investing strategies have underperformed the market. There have been times when there was a significant discrepancy in performance. This short-term underperformance will happen no matter if you focus on qualitative or quantitative factors most of the time when investing.

In the sense that a skillful investor who plays their cards well may not experience a low year for ten years or so, it is preventable. In a similar vein, it is conceivable, with some luck, to outperform an index year after year. However, there is no method that can be implemented that would ensure such outperformance.

You should focus on developing a plan that maximizes your chances of success. Even though following this plan for a series of investments can't guarantee success in every deal, it should lead to good returns over time.

It's true that there's more than one way to skin a cat. Promoting dogmatism would be counterproductive, and I have no intention of doing so. I do want to caution you, however, about conflating common wisdom with actual soundness. A lot of the common sense and moderate-sounding advice offered to investors is really flawed.

The practice of diversification is the best illustration of this. It's a good idea to spread your money around and wager on many distinct, high-probability outcomes. It's not the same as spreading your money out over dozens, or even hundreds, of stocks. Even though there are thousands of promising investments, it doesn't mean you should put your money into each and every one of them. Some will seem more rational than others, after all. There is no use in taking on a number of challenging jobs in the hopes of producing the same outcome that can be achieved by taking on a small number of extremely simple chores.

It's okay if you don't agree with me on everything; the majority of the population doesn't. However, you must always investigate the implicit premises of any investing strategy. It's possible you'll reach the same conclusion as those who diversify extensively. But you have to decide it on your own.

The basic notion of diversification has been overlooked by many investors. They don't see the point in diversifying their holdings. How it reduces risk is unclear, and neither is the point at which the added advantage of a second position stops being significant. It's possible that spreading your investments out might be a wise move. The gains in terms of risk reduction and the drawbacks in terms of reduced selectivity must be weighed before you can make that choice.

If I had to spend my whole life placing wagers on horse races, I can safely say that I would not bet on very many of them. When I did wager on a race, I usually spread my money out among numerous horses.

Why? That's because I'm far better at communicating with humans than I am with horses. It seems far more plausible that certain horses in some races will get undue favor than that I will ever be able to make fairly precise assessments about which horse is most likely to win a particular race. Not betting on any horse races at all is probably the wisest course of action for me.

As a result, we must wonder whether stocks may be compared to horses. That's not the case, in my opinion. I feel more at ease separating the winners from the losers when it comes to business, particularly when the odds are stacked against you. Ignoring a problem would be the only strategy that would be used the same way. In matters of financial or emotional commitment, it is wise to act less and think more.

A good investor will always trust his own instincts. Without putting your views to rigorous testing, I don't see how you could ever develop such assurance. You will never find the confidence you're looking for if you stick to a philosophy that you haven't critically analyzed.

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