100 Things I Learned from Investing (26-50)

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Calvin Leung

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26.  Look out for CATS – catastrophic risk.

I eliminated almost half of the “seeming interesting” companies I found due to “cat risk”. To me, cat risks means the probability of total loss (or >50% loss) on my investment. Fraudulent management, risky business behavior, over-leveraging, bankruptcy, war, government policy changes, natural catastrophe could all become a cat risk to an investment.

27.  One of the indicators of competitive advantage is the pricing power of the company’s product – It is the ability to raise prices for their products while maintaining sales in a competitive environment.

28.  Focus on what the management has done in the past, look for their promises and forecasts in the past and try to match them with what actually happened. The comparison will illustrate their credibility or their understanding of the business they are managing.

29.  Decision making – never make investment decisions when you are burned out after gym, or just had a bad argument with your lovely ones. “Willpower” is one of the most important factors in decision-making. Good mood, regular exercise, healthy diet and sufficient sleep will all help with your “willpower” and decision making. Sugary drinks, caffeine and looking at something red could temporarily improve “willpower”, and that might be why Buffett drinks 6 cans a day. (Not that I’m encouraging you to do so)

30.  Explain to your closest ones what you are doing. Communicate, and gain support. It was hard for outsiders to understand why you would want to get involved with stocks during 2008 – 2009. Make sure that people around you understand your investment philosophy and know what you are doing. They could provide the much needed mental support through the tough times when you seem to be crazy by many.

31.  Read quickly – take a speed reading course. You will have to learn to digest a lot of material over time.

32.  Before I start to research a company, I always spend a few minutes brainstorming a checklist for a company, and check each item one by one. I add questions and things to check as I go through the list. Most of the time, a research project goes into my “no-no” or “too hard” category before I even complete the list. This technique saved me tons of time and freed me to move on to other opportunities.

33.  Look for special insights from each of your decision – do you have insights that most people don’t have about a company? Have the market considered what you know already? The market generally does not misprice securities without reason. Sometimes it’s worth the extra work to find out the reason.

34.  Confidence should come from sufficient facts and solid analysis. I gain my confidence through rigorous research and careful decision making. If your facts are right and your analysis is solid, your decision shouldn’t be far from being right.

35.  “Stay hungry, stay foolish” – Steve Jobs.  Acknowledging that there are a lot of things I don’t know or understand is one of my most important drivers to keep learning. I avoid fooling myself that I am a better investor just because I’m into value investing and I’ve read so many books about it. I constantly remind myself I have a lot to learn and I am not any smarter than most on the market (which is probably true). That helps keep my ego and confidence level in check.

36.  Will I be able to fully understand this business? – This question eliminated more than half of the companies coming out from the Value Stock Screens.

37.  “Invert, Always invert” from Charlie Munger – Before telling myself why I should invest in something, I always take double the time to look for reasons why I don’t want to invest into it.

38.  Neglect optimism from management that isn’t’ supported with facts and sound logic.

39.  When I am analyzing an industry of a company, I like to check out the worst performing companies (probably already bankrupt) in the history of the industry and study how a business could fail in that industry.

40.  Contrarian doesn’t equal value investing, but most of the value deals are contrarian. It isn’t logical to feel better or worse just because you’re in the minority. Just keep in mind – the majority could be right sometimes.

41.  Stop fooling Yourself – Warren Buffett is the minority. Obsessive level of focus is what led him to succeed. On top of that, a high IQ, fast reading skills, fluency with numbers and impeccable memory gave him a huge lead compared to the rest. Snowball is the best book about Buffett’s life and I recommend anyone in the game to read it.

42.  Try to remember key statistical numbers as you read – It helps to “ring a bell” during your research as you come across other comparable numbers. You will be amazed how much data you could memorize over time and how much those numbers could help you in the long run.

43.  Good ideas are rare – When I find one through ***Rigorous*** research, I bet heavily.

44.  Always sit with some cash for a special opportunity – you wouldn’t be able to hit a homerun even with the lousiest pitch if you didn’t have a bat in your hand.

45.  Don’t look at the stock price until you are done with your analysis. Look at the company’s number as if you have enough money to buy the entire company, and then divide that by the number of shares outstanding.

46.  Media and PR sentiment is almost always a quarter or two behind in business environment that is going through an inflection point. Growth or decline, analysts tend to have a hard time forecasting changes that comes in exponential form. Looking at Apple’s turnaround and RIM decay, and compare that to the media’s sentiment, this will become clear.

47.  Buffett made this sound all too easy – intensive research, experience, all that hours in reading, emotional stress, capital stress, tough decision making points, humiliation due to mistakes, losses, friends/family opinions on what you are doing…the list goes on. Sometimes it’s easier to just stick with Index-funds or high interest saving accounts.

48.  Tech companies aren’t scary – what’s scary is the constantly changing atmosphere that could destroy almost any competitive advantage a company has. However, it doesn’t mean there’s no value deals in the tech industry. I just tend to discount any premium placed on current competitive advantage, and assume there will always be a newer and better technology popping out in a few years.

49.  To focus is to say no – The best idea usually comes after filtering through tons of mediocre ideas, so focus on the best ideas. Buffett said, “Invest like you have a punch card with 20 punch-outs, one for each trade in your life.” So I work hard, keep looking, and try to go through as many companies as I can. If I am fortunate to live long enough, and I’m going to invest for another 40 years, I only need to find that one great punch every 2 years. I have already exceeded that limit.

50.  Make a call – most people will be surprised by what they can get by simply calling up people. I shamelessly call up retailers and different people to ask for more information. I figure that the worst thing that could happen is that I will get my number blocked. Some investor relations teams would actually respond to small investors’ inquiries or concerns about a specific number or any possible mistakes in an annual report. Sometimes you can get more operation details through calling the sales team than reading the annual report.

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3 responses to “100 Things I Learned from Investing (26-50)”

  1. I can identify with many of these. I like these two, in particular:

    26: I like to say that investors are defined by their losses. A good investor knows how to minimize losses and this makes his winners stand out. People always take into consideration the possible risks that would cause minimal downward swings, but we often overlook the most dangerous risks of all–ruling them out as unlikely. But even a small chance of the catastrophic means you are putting your money at great risk.

    29: Decision Making: In psychology its common knowledge that using the analytical and statistical system in our brain does deplete our energy levels. So I think you bring up a good point that it is important that we don’t make investment decisions when we are not in the right mindset. Otherwise, we might be relying on our brain’s system that uses intuition. This system is always looking for the “easy answer” and can be detrimental too our investing.

    Great article.

  2. frankiethepunk says:

    I have learned from hard experience that #49 coupled with Buffet’s approach to a long term commitment to owning a stock is the most powerful combination to building wealth.

    I used to be an inveterate trader. I was addicted to the action. The problem was that after a few years I realized that at best my results were mediocre. Sure, there were times when my trading activity showed huge gains. But inevitably I gave all these gains back by. After much thinking I realized that I was addicted to the illusion of making money. In fact I was merely treading water.

    Warren’s two most powerful ideas are as follows: The first is to be like a baseball player swinging for a home run. Unlike in baseball, the investor is not out after three strikes. Indeed, Buffet councils to wait until you are absolutely sure before you swing the bat. He also admonishes that most investors, himself included, have only one good idea a year. Think of the many hundreds of ideas and situations he evaluates! And yet only one of them is good enough to swing at.

    But how do you know that that one idea is THE ONE? Joe Ponzio in his book “F Wall Street” articulates his method which is brilliant in its simplicity. “It should be a no-brainer.” In other words, the rational for making a commitment should be so obvious that even a moron would recognize that it was an outstanding investment. How often have you evaluated an investment situation and been totally baffled by a company? ‘What exactly does the company do?’ If your first reaction is total bewilderment, then you should discard that option. No matter what anybody says. If you don’t understand the company don’t buy it. Its as simple as that. And many times one’s ego is wrapped up by fooling one’s self that you do understand the investment, when in fact you haven’t got a clue to what its about.

    The second most powerful idea of Buffet’s is to make a long term commitment. One of my favorite Buffet-isms is, “don’t even think of buying a stock for 10 minutes if you don’t intend on owning it for 10 years”.

    How often have you struggled to try to outsmart the market? I used to try and would invariably get depressed when I failed to do so. Then I came to the realization that nobody can outsmart the market, not even Buffet, who is arguably the smartest investor of all time.

    Buffet’s approach is totally different. Instead of looking for an exit strategy his commitment is famously “forever”. Its a heck of a lot easier to develop a strategy for finding “the most fantastic companies you can possibly find” to invest in, than to develop a trading strategy that will get you in and out of stocks and make consistent profits. The former strategy is eminently doable, the latter is practically impossible, unless you have the instincts of George Soros, and there are only a handful of people on the planet that can achieve that trick.

    There is a fantastic tool on http://gold.globeinvestor.com/ that allows you to backtest a portfolio of stocks and see how that portfolio would have performed if you had held onto it for 10 years or so. What I did was put together a bunch of different portfolios and see how a one time investment in a portfolio of stocks would build wealth over a period of time.

    This tool will teach you a very valuable lesson. Buffet was right. If you choose the very best companies and hold onto them for a long period of time, your portfolio will produce better results than frantically trading stocks back and forth. “Time is the friend of the exceptional company and the enemy of the mediocre company”.

    The moral of the story? Spend all of your time honing your skills looking for the exceptional investment, the one that is so obvious that anybody could recognize it. Don’t pull the trigger until then. Even if it takes you 10 years to build a portfolio, you investment portfolio will generate more wealth more quickly, than frantically trading. Its all about the search and commitment to incredible investments, not the trading of mediocre ones.

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