How to invest

Written by

Jae Jun

I’m not here to teach you how to be a great investor. On the  contrary, I’m here to tell you why very few of you can ever hope to achieve this status.
It doesn’t matter how intelligent you are, how many books you’ve read or how good you are with numbers. The truth is that you may never be as good as you think.

Sorry for the shock but this was a speech given by Mark Sellers of Sellers Capital to Harvard MBA student’s in 2007. It is a speech that helps to expose weaknesses and build on your strengths.

You can read all the Berkshire letters you want, but when it comes to crunch time, the majority of people end up buying high and selling low.

The past 11 trading days has proved just that. If you survived so far, well done, but expect to see more red and be excited about it, because this could another 1 in 10 year opportunity to stockpile stellar companies and ride it up when the economy gets better.

Here’s a quote I shared on my facebook page.

“You make your money during bear markets; you just don’t know it at the time.” – Shelby Cullom Davis

So here we go with 7 things  you need to blow the market out of the water.

Trait #1 – Ability to buy and sell stocks against the market

Everyone thinks they can do this…[when] the market is crashing all around you, almost no one has the stomach to buy.

Trait #2 – Obsession

The second character trait of a great investor is that he is obsessive about playing the game and wanting to win.

Trait #3 – Willingness to learn from past mistakes

What sets some investors apart is an intense desire to learn from their own mistakes so they can avoid repeating them.

Trait #4 – Inherent sense of risk based on common sense

I believe the greatest risk control is common sense, but people fall into the habit of sleeping well at night because the computer says they should. The thing about common sense is that it isn’t very common.

Trait #5 – Confidence and Conviction

Great investors have confidence in their own convictions and stick with them, even when facing criticism.

Trait #6 – Get both sides of your brain working

If you don’t think clearly, you’re in trouble. There are a lot of people who have genius IQs who can’t think clearly.

Trait #7 – Ability to live through volatility

Number 7 is the most important, and rarest, investor trait of all.

To make money, you have to cope with volatility. Volatility is not risk.

Good luck during this difficult period. I hope to see you on the other end victorious.

Guest post by

Elie Rosenberg

ValueSlant.com

“Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.” – Warren Buffett

According to the Oracle himself, what sets great value investors apart from the rest of the pack is not their tremendous analytical skills, but their ability to control their emotions and think rationally about their investments.

The first step in developing this trait of investing self control is to know the enemy: What irrational emotions and misguided ways of thinking are we prone to? Once we know what to be wary of it is much easier to start refining our investing discipline.

Luckily for us, a relatively new field, behavioral finance, has given us practical insight into what irrational cognitive biases we naturally employ in investing.

Here are my personal top five investing biases to avoid. I can guarantee you that just starting to think about when you fall prey to these biases will help your investment process.

1. Anchoring Bias

Anchoring refers to fixating to one’s thoughts on a specific set of facts to the point where one does not consider other more relevant information.

My favorite (or least favorite?) example of this is fixating on stock price instead of intrinsic value. We think a stock must be expensive if it has doubled in the past year or that it must be cheap if it has fallen 50% in the past year. Of course, value investors know that whether a stock is cheap or expensive has nothing to do with what the stock price has done in the past year, but rather everything to do with intrinsic value of the business. Yet we have a hard time looking past the chart.

2. Confirmation Bias

Anchoring’s evil cousin, confirmation bias, is the tendency to misinterpret new information in way that confirms one’s initial idea about a subject.

Conformation bias can easily sneak in over the course of our stock research. We get excited about a company, form an initial investment thesis, and then begin to brush off any red flags we uncover. They usually come back to bite us later.

3. Overconfidence Bias

You may have heard of the research studies that show that far more than half of all investors think they are above average. Overconfidence can lead to all sorts of investing mistakes from ignoring warning signs about bad companies to holding on to losing positions too long. We need to have confidence in our abilities in order to invest well, but not the point where we become blind to contrary opinions.

4. Overreaction Bias and Availability Bias

These two tend to work together. Overreaction bias refers to a change in thinking induced by an event that is not correlated to the rational meaning of that event. Availability bias refers to putting greater weight on recent events than is rationally warranted.

These biases are at work in the common occurrence of investor overreaction to bad news. Investors react to a minor piece of bad news as if it were doomsday for a stock (overreaction bias) and think that the current bad news now means the company must be terrible despite whatever else has happened in the past (availability bias). Company news has to be viewed in a long term context with an eye for how it truly impacts intrinsic value.

5. Herd Behavior Bias

Value investors know the importance of staying apart from the pack and the latest investment fads, but it is easier said than done. We naturally enjoy the reassurance of a group and find it hard to stand apart. We have to use our adherence to value investing principles to make sure we are chasing intrinsic value and not the next bubble stock.

Elie Rosenberg is a value investor who runs Valueslant.com, a website featuring in-depth value investing analysis. Sign up here to receive the free ebook – 16 Ways to Find Undervalued Stocks.

Track Record Since Inception Sept 2007

For the very first time, I’m making public my full performance since inception now that I’ve made the announcement to start managing money (company will be called OSV Capital) by the end of this year.  Thus the importance of setting my records straight.

To make sure it is, I went through all my statements from the inception date of September 27, 2007 to December 2010 and included everything to the cent.

Back in my rookie year of 07-08, I was much too busy learning and studying instead of spending some time in calculating my IRR and keeping a record of my returns. It was not top priority. But I know better now and I also know that many people still do not measure their performance properly. If this is you, use the free spreadsheet for calculating IRR. It does it all for you automatically.

Looking back, I should have gotten into the habit of calculating the returns every month.

Nevertheless, here are the official results of my portfolio since inception. The annualized performance includes dividends and net fees.

Click on the graph below to enlarge.

Aiming to Beat the Market

To be honest, I’m surprised my results are this good and I do admit that much of it is associated with the big spike in 2009.

My record so far is 3 out of 4 beating the market and I do hope this continues but a question I’ve been asking myself is whether beating the market is that important. Don’t you think it leads to the same short term mentality on Wall Street if everyone is just focused on beating the market each year?

The correct way to think about performance would be to measure performance in 2-3 year intervals against the market. On any given year, there is a possibility of under performance, but as a value investor, there is a good chance that a company I have invested in will not realize its intrinsic value until 2 or 3 years later.

Think of it like chess or even sports. Not every team is like the Yankees or LA Lakers. There are more teams that have to rebuild and strategically acquire players for the future. The next one or two seasons could be a disappointment, but over the long run, once those players reach their intrinsic value, the return then becomes astronomical.

I see it the same way with managing a portfolio. One example is GRVY.

GRVY has fluctuated between 10-13% of my total portfolio and ended up just 4.91% in 2010. But I still hold, knowing from the beginning that it was going to take at least a good 1-2 years before I could expect any price appreciation.

Now you could settle for a consistent 15% gain every year (which is outstanding by the way) or admit there will be times of underperformance while you wait patiently for time and Mr Market to be on your side and let your value stocks explode.

That’s what I’ve learnt about value investing, especially in small to microcaps. It does nothing for a long time and continually tests your patience, and just when you have had enough and are about to sell (or have sold) news breaks and the stock literally erupts. Proof is in my 2009 performance.

My aim is to beat the market of course, but I won’t be focusing on doing it every year. I know I’m not that good. But I do know I can crush the market in the long run.

The Best 3 Mistakes of 2010

I received a very sincere email the other day where the sender described us as students of investing as we are destined to learn until we die.

And that’s true because 2010 contained many of my best mistakes. I discovered things that has helped me improve as well as giving me a reality check.

Mistake #1: Trying Too Hard

My performance in 2009 was both good and bad. The good is obvious, but what I felt like I had to do in 2010 was follow up with another successful year. I felt like I had to somehow annihilate the market a second time to prove something.

What happened instead was a complete failure.

Throughout 2010, I ended up trying too hard.

• Trying too hard to make sure my analysis was correct.
• Trying too hard to make sure my picks always went up instead of down.
• Trying too hard to squeeze out as much profit as possible.
• Trying too many things at the same time.

I was a jack of all trades master of none.

Mistake #2: Emotional Investing

I found myself watching stock prices much too often. I was constantly checking and cheering for my stocks to go up.

Until 2010, I could go for days or even a week without checking prices and not worry about price volatility.

That mentality was broken in 2010 and it led to large losses and many missed opportunities.

If price went up, I was happy and convinced myself that it would go up a little more. When prices dropped, I convinced myself that the price would fall a little more and I could buy the stock then.

As you can imagine, neither worked.

VVTV and ROIAK are prime examples of both. I bought VVTV and ROIAK with solid fundamental reasons and conviction. Both positions went up over 1000% when it reached the $5 mark. Instead of selling leading up to this point, I held on, convinced that it could go higher. Both fell in huge leaps. Once the stock reached a flat steady price towards the bottom, I sold out then.

Impatience and disappointment clouded my judgment.

Then came the opportunity to buy back into both of these stocks at prices below the required margin of safety, but nope, I had hindsight bias and refused to buy.

Mistake #3: Mistake in Selling

Transitioning nicely from mistake #2, you hear all the time about selling stocks when you have made a mistake in your analysis, but you rarely hear the opposite. If your analysis tells you that selling a stock was the wrong choice, you should buy it back.

The fact that the original price you paid is lower than the price now should have no effect on the decision.

Looking Forward

My theme going forward is to remember what it was first like starting. To get back to basics.

There is more than just the 3 mistakes, but the big three is a container for the many other smaller mistakes made throughout the year.

I don’t mind sharing all this because I know you have gone through the same thing. I’m sure even Buffett and the best of them went through all this at one point in their life. How else would they be able to talk and write about such insights on behavioral finance?

The first step to getting better at anything is to admit mistakes. Now that I’ve laid it all out before you, I’m ready to advance and continue learning.

facebook

I’ve created a facebook page for Old School value. It’s a way for me to write casual and short stock related talk without spamming your inbox. So go ahead and “Like” the page and let’s get talking. I’ve found it much easier to tip off followers on stocks I am liking.

Wanted to pass on this fantastic interview by Ankit Gupta of Selected Financials.

Ankit continues to blow me away with his investing passion, thirst for knowledge, entrepreneurial spirit and business acumen. All while completing his studies in university. I found the content of this interview absolutely bloody brilliant due to the caliber of the questions.

What is your fund’s underlying approach? What wrong do you right in the markets?

I want to find companies going through a transition. Eventually, that transition will translate into others seeing that the company will be worth more than they originally thought. It might be divesting a cash burning division, or new credit facility, or maybe the company just did a merger or acquisition allowing the business model to be leveraged, etc. The objective is to NOT be an activist in these situations…  Read more