Two unwritten laws of investing should lead your decisions. One, you will make mistakes that will result in the loss of money. Two, businesses and consumer preferences change. So, you will need to adapt and develop new mental models. In a recent CNBC interview, Warren Buffett discussed how our consumer habits hit Coke and Ketchup are changing and how it affects their valuation.
If you admit to the two unwritten laws of investing, you will become a better investor - one that thinks carefully before buying a stock. And if business knowledge is continually evolving, then growing your knowledge base is fundamental to stock investing.
In The Education of a Value Investor, Guy Spier describes a simple tool: the checklist. A few of his checklist items include: Are any of the key members of the company's management team going through a painful personal experience? Is this company providing a win-win for its entire ecosystem? Is this stock cheap enough (not just in relative terms)? And is the price for the business reflects the value today - not for an excessively rosy expectation of where it might be in the future?
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My brother and I sat down for lunch with a savvy real estate investor a few days ago. The real estate investor's dad used to make horrible, costly investing decisions, he told us. In the middle of 2007, his dad purchased homes as investments. And in the late 90s, his dad bought stocks of tech companies. Concluding that any business his dad would invest in was bound to fail, he jokingly said, "If my dad entered the morgue business, people would stop dying."
So if you hear or read about an investment idea that was thought of or written by someone else, it's probably too late to invest.
You know the difference between a healthy relationship and a complicated one. In the former, you meet someone. You immediately have exciting topics to talk about, share common interests, and shortly after the first date, and both sides are genuinely interested in the well being of one another. Anything outside of that can be defined as a complicated relationship.
What is true in relationships is also applicable to stock investing: you need to feel comfortable about the business you invest in, and you need to feel somewhat assured that you can understand where the company will be over the next five years. Surprises and hidden truths, in both business and in real life, work against you.
Reason rests where study, observation, and knowledge live. If you buy businesses, you need rationale reasons. When asked his secret to success, Munger once answered "I'm rational."
Unless you think carefully of your goals, you will likely find yourself attempting to achieve someone else's goals. You hear a neighbor earning a fortune by buying Bitcoin, and you will try to beat them at their own game. Another example of the dire consequences of not having clear goals is that you will not know when to stop and make bets that you cannot afford to lose.
I have two goals in stock investing. First, my goal is to beat the S&P 500 index over five years. Second, to grow my knowledge of finance by studying businesses, industries, and management.
Since I started to write about businesses about a year ago, I developed the following new habits:
1. Sift through the operating financials of 15 companies each week.
2. Read two to three annual reports each week.
3. Study and refresh my memory on investment concepts every quarter.
4. Research a new industry every month.