by elmads

Introduction

There is no perfect investment strategy for everyone, but there’s solely a strategy that specifically fits your time and your personality, your whole being.

I didn’t specifically choose value investing because of external forces, it just so happens that value investing principles coincide with who I am.

Contrarian

“Opportunities exist where the herd has not looked into it yet”

-Unknown

Contrarianism is a having a different point of view from what is the generally accepted opinion in investing. An independent thinker, who does not purely rely on someone else’s analysis and decisions.

Havin a contrarian personality in investing will sometimes put you in a place of isolation from other investors, as your views can be distressing for some who has the opposite opinion as yours. You’re a person who doesn’t mind being different at time to time.

You’re basically walking the opposite path of where the herd goes. It’s not that you are arrogant, thinking that you’re intelligent, and way better than others – these are actually the traits that will cause an investor’s demise in his/her long-term portfolio gains.

You’re actually the complete opposite of those negative 3 traits, you understand your lack of learning, that you don’t know anything hence your willingness to be a forever learner (You strongly believe that humility is a paramount trait to achieve success), and that you’re doing it for yourself and your family.

You tend to grow and learn more, and encounter information that will help you to make investment decisions that will bring you nearer to your financial goals. What you’re looking for are opportunities where people have not looked into yet, market misprices and small businesses.

You don’t fish in a pond where almost the majority of fishes are taken already, and in a pond where a large number of individuals are fishing on it. You fish on a pond where the odds are the fish are a lot with only a handful of people who know about it.

You look deeper at those pieces of data, at the same time you never forget to understand the larger picture of those connected information, and make your decisions based on it. And whatever outcome your decisions will yield, win or lose, you’re completely accountable to yourself. No pointing faults at others, you only point at yourself.

Long-Term Thinking

Value investing is dynamic, it changes and evolves overtime. It started from Benjamin Graham’s Net-Net Investing which was adopted by Warren Buffet, who also did same but called it the Cigar Butt Investing.

Eventually, Buffett transitioned his style of value investing from cigar butt to buying companies with long-term competitive advantage with his partner Charlie Munger, while also adding the principles of Phil Fisher’s focused investing.

A Short History of Value Investing

The modern form of value investing, where we look into the long-term competitive advantage of a business would not be a successful investment strategy if we don’t practice and uphold Long-term thinking. Investment returns are made in the long run.

Just like with wonderful businesses, it will always take time for such businesses to reach a dominant market position in their industry, where growth and expansion are important drivers for its success. Let’s take for example, the top Technology Companies in the US, Apple, Amazon, Google, Tesla and Microsoft. It took them decades, not within a year, to reach where they are now.

Delayed Gratification

Investing requires capital to be invested. Allocating a portion of our hard-earned salary for various asset investments will help us propel to achieve passive capital growth. But before this becomes a reality, one must have the the fundamental knowledge, skills and the most importantly; “Temperament” to save money. Know and practice how to save money.

The pre-requisite to investing is saving money, nothing more, nothing less. If it’s hard for you to save a portion of your salary, then it will also certainly be hard for you to allocate money for investments.

Investing is allocating a portion of our money, and letting it grow by itself without requiring physical labour. It is delayed gratification in its core. Delaying our short-term wants for a long-term fulfilling and sustainable reward.

“It’s waiting that helps you as an investor and a lot of people just can’t stand to wait. If you didn’t get the deferred-gratification gene, you’ve got to work very hard to overcome that.”

Charlie Munger

The Controllable and the Uncontrollable

There are things that cannot be controlled, and one of which is uncertainty, randomness and black swan events. How life will pan out for us in the future, how will our investment do, what economic events will happen, and what events in life will shape us moving forward. There are a lot of things we cannot predict and are completely out of our hands.

Yet, there are certainly things that we can control as well.

• On how we perceive information that is happening to and around us?
• What options we could take based from our perceived information?
• What are the actions we are taking next?
• And how strong is our will to consistently take those actions until we reach our aims?

It’s a matter of less complaining and brooding, and more of analytically finding ways to solve the problems. Then the bulk is taking actions.

NOTE: ‘Inaction’ is also our decision of taking an action. Just like in investing, an investor’s choices are not just about buy and sell, but also holding the asset for a long-time. It is taking an action of inaction. There are many reasons to just hold, such as you may believe that the short-term events happening right now are just noises that skews the future positive growth of your investments, based on your own research, projection and understanding of the asset.

We have to understand that there are a lot of external factors that can affect businesses, governments, countries, and our individual lives which definitely have a direct impact on our investments. We cannot do anything about it, but what we can do is to mitigate the risks with the information that are presented to us, and understanding which one could be detrimental on our investments. Make a decision based from the possible risks and rewards.

Various mental models are actually vital for mitigating uncertainties. I’ve discusses this in my blogs titled “The Investment Mental Models I Follow & Practice Part 1” and “Part 2”

Numbers

I’ve always liked numbers, despite this, I was just average in mathematics in school. 😂

Logic and mathematics are disciplines that are joint together, because mathematics use logic as language, as a mathematical proof.

As like what Richard P. Feynman has said “Mathematics is a language plus reasoning; it is like a language plus logic. Mathematics is a tool for reasoning”.

I just find it funny that I’ve appreciated mathematics now than when I was at school. Using mathematics as a tool with my endeavours and day to day living has never been this exciting and interesting unlike before.

Let’s say you want to lose weight. The usual question is how, but we need more than that. We need these questions.

What’s your current weight? your BMI? what’s your timetable to lose that weight? how much do you want to lose? what exercises are you going to do? how many times in a week are you going to do those exercises? how many calories will you burn from your accumulated exercises per week? what is your diet? how much should be your caloric intake in a day based on your current height, weight and daily activity? what happens if you eat less than your daily/weekly allocated caloric intake, including your calories burnt per week through your accumulated set of exercises weekly?

Then with those variable are taken into account, how will you be able to hit your goal time to reach your desired weight? What if you don’t hit the weekly mark, what will be the alternative way? will your time for losing weight be extended or decrease?

These sets of question of mine, can be answered by Mathematics, not accurately but near as accurate. A simple caloric deficit computation where types of exercises, diet, daily activities, and time table are factored in. Basically, when all of these questions are answered, we could get a reasoning and motivation to be on mark to do things repeatedly until the goal is achieved.

That being said, if it doesn’t work, then we need to re-evaluate our initial thesis, and further look for data that we may lack, or might have skewed it.

How about in investing with compound interest? I do this this by scenarios based on my current life circumstances. Everyone can do one as well, you’ll be able to project somehow how much you’ll reach a certain amount of net worth at a specified time. Let’s say for example you want to reach A million US dollars at age of 65. Based on your monthly contribution and yearly investment return, you’ll know how much you’ll need to invest consistently through out your life until the age of 65. I’ll share you a link of an article I’ve made regarding this with the spreadsheet I use for this that freely I share to everyone.

“Part 1 – The Inflation Adjusted Retirement Calculator” & “Part 2”

How about in equity investing? it’s the same, how much free cash flow will a certain company can generate the next few years and to perpetuity (terminal) based from their financials, and guidance from the management. Then we we discount all of those projected cash flows to its present value, where the discount rate used will be based from the business’ Cashflow, Growth and Risk. This is actually a bit more complex than my losing weight scenario.

The negative side of numbers is that, quantitative analysis usually tend to put less weight on the qualitative side of things.

Insatiable Curiosity

My curiosity in investing started when I did the peso-cost averaging investing method in some of the companies listed in the Philippine Stock Exchange back in 2013. Luck was on my side because I was able to ride the global economic expansion from 2013 to 2019. During that time period, my portfolio generated a strong return of 16.49% Compounded Annual Growth Rate (CAGR) despite not having any core investing knowledge about equities. I attribute those returns (a quadrillion percent) to luck, nothing more, nothing less.

I was so surprised and even asked myself how did that ever happen. I was just sitting on my ass and I made money? I just couldn’t fathom what happened, it was just insane for me that time. My curiosity got so strong that I went deeper into the investing world. I went to places I never knew existed before, and I’ve never stopped since then.

It started as understanding the investing world, businesses, corporate structure, accounting (to be able to read financials), economics, behavioural aspects of each disciplines and self control. I went to places that I never thought I would be interested to learn, not even in my wildest dreams. Curiosity can indeed push us to go to unexpected areas, (our personal uncharted territories). With it, I further learned to get to understand what are the opportunities and un-investable businesses based from the principles of value investing.

To find opportunities in the market is to have an insatiable curiosity of how things work.

As like what Li Lu, a Chinese-American value investor and the founder & chairman of Himalaya Capital Holdings, said: “An investor is a researcher and journalist, with insatiable curiosity. You are trying to figure out how everything works. The more you know, the better you are as an investor”.

To Sum It Up

Value investing mustn’t seen and be put into the pedestal as the best investment strategy in the world. It’s a foolish perspective if deemed so. It’s just one of the many other investment approach that may or may not work for you.

There are other strategies out there that worked best for others. One of the best examples is with Warren Buffet. He has been deemed as the greatest investor of this generation, yet there are others who still beats him in terms of investment returns, and that one person is Jim Simons.

Mr. Simons is known as the Quant King, the owner and founder of Renaissance Technologies. His Medallion fund generated an average annual return of 39% after fees since 1988, whereas Warren Buffet only had 20.1% since 1965.

Below are the examples of other well known investors who followed their own strategies, and invested in a specific investment class which perfectly worked well for them.

My point being, It’s not important which strategy is the coolest, or the one which most people use, instead find the one that naturally coincides with your own being.

For me, value investing has been that well suited strategy. Its philosophies and principles are naturally part of myself. I do hope you also find yours.

“Value investing is at its core the marriage of a contrarian streak and a calculator.”

-Seth Klarman

Knowledge is my Sword and Patience is my Shield,

elmads

This blog is for informational purposes only and not a Financial Recommendation. Not all information will be accurate. Consult an independent financial professional before making any major financial decisions.