The Story Continues...

I began 'blogging' over a year ago. This post will reflect on what has gone well, what I hope to do better, and how the blog has evolved.

What Has Gone Well?
Although I was not able to blog in a systematic manner last year (i.e. in 2017), I find that there has been a positive change in that respect, so far this year. This is particularly impressive given that I am also engaged in giving my IGCSE examinations. I think I have begun to develop a body of work, and have been reading a variety of interesting material. In this respect I should like to thank my father, for his constant support, his help with editing my posts, and for explaining any concepts which I struggle to understand. In addition, I am grateful for his help in navigating through the barrage of available material, and advice regarding what will be a more 'value-adding' read.

What has not gone so well?
Firstly, as I mentioned above, I have been irregular in writing my blogs, but believe that there has been a positive improvement on this front. Secondly, there is significant room for improvement where my writing style and skills are concerned. In an attempt to make all the points I come across, I often do not express my thoughts in the most elegant manner, which makes it difficult to read the blog. A lack of focus on the writing-style reduced the hurdles and barriers which were making it difficult for me to blog regularly. However, as I have finally got into a 'rhythm', I intend to focus a little more on my writing-style too. My posts are also often more summaries than a bunch of thoughts. In my opinion, although this is not entirely what I had set out to do, it may produce a useful bank of work, which I should be able to refer to in the future.

How the blog has changed.
The blog has become a personal journal or diary. This is because, I have not shared the link with people I know, because I have not blogged regularly, because I am not a professional, famous investor, and because my blog is more a summary of others' writings than a piece of original work. In the future, as time goes on, I hope this blog will gain a reader base. However, for the time being, I am considering this a personal diary.

Seth Klarman: Value Investing, Investment Strategies and Advice for Success

I just watched the first 37 minutes of the following video by Seth Klarman. In this post I will briefly mention what I learned from the video.

About Seth Klarman:

Seth Klarman is the Chief Investment Officer at the Baupost Group, a Boston-based hedge fund with about 30 Billion USD in AUM. Seth Klarman is also the author of "Margin of Safety", and a believer in Benjamin Graham's value investing methods. He also believes in the importance of a long-term orientation.

Learnings:

1. Focus on risk first, before returns

This boils down to the idea that if you "avoid the losers, the winners will take care of themselves".

2. Look for mispriced companies, and a catalyst to reduce the mispricing

You want to purchase companies below intrinsic value. If it is trading at a value which is 2/3 of the total value of assets, it is a bargain.

3. About Risk

Firstly, risk is a measure of the probability of losing money, and the amount of money that can be lost. If you assume the worst case scenario when you make an investment decision, and still think a company is undervalued, then this is a relatively low risk investment. 

Secondly, volatility is not risk. Although the two are often mixed up, it is important that you distinguish between the two. Risk, as is mentioned above, is the probability of losing a certain amount of money. By contrast, volatility is the amount of fluctuation in share prices on a daily, or even hourly basis.Volatility can become a risk if you are forced to sell at a low point. However, if you have the ability to take long-term bets, it is actually the source of opportunities; if a good company is volatile and hence trading below intrinsic value, it could be a good investment.

4. Relative and Absolute returns

Relative returns are when you measure returns relative to or in comparison to the average, or someone else. By contrast, Absolute returns measure the percentage appreciation (or depreciation) in the value of the assets held. Absolute returns are better than relative returns. 

This is because relative returns breed mediocrity.They follow the principle of wanting to make a little more-or lose a little less-than your competitors. However, this means you are invariably close to the index, and cannot outperform the index.

Instead, Absolute returns encourage you to measure how much money you have made or lost. This makes the loss more significant, and encourages risk-aversion. It is based upon the idea of trying to make a lot of money in bad times, and making a decent return in good times. This metric is better, because in the real world, what affects your purchasing power is how much money you have, as opposed to how much you have relative to another individual.

5. Bottom up and Top down analysis

Top down analysis involves making macro-economic forecasts, determining the impacts on industries, and then determining who will win in the given industry. Bottom up investing is better than top down investing. In top down investing you must make consistently accurate macroeconomic forecasts. This is difficult! No one really knows what's going to happen. Instead, in bottom up investing, you 'simply' determine what something is worth, and buy it for less! Remember, however, that bottom up still considers the top. It's just that the top is considered later and is thought to be less important.

6. Edge

As an investor you need to look for your edge. You must ask yourself, "what do you know or have (e.g.: a lens or perspective), that others don't?". A significant edge is a long-term orientation. This is because it leads you to make more rational, well thought-through, long-term oriented decisions, instead of focusing primarily on short term growth. For this an investment fund needs to have capital belonging to like-minded people who have a similarly long-term orientation. A second edge, if you are an investment fund manager, is an open mandate. This is because this means that there are fewer restrictions, and that you can capitalise on the more interesting bargains, regardless of the asset class.

7. Forced sellers

Buying from a forced seller, or a seller who knows less than you is very, very desirable. This is because a forced seller does not have the option to determine whether an investment is good or bad. Thus, when there a large number of forced sellers, you can capitalise on the ensuing drop in asset price. Similarly, a seller who knows less than you do, cannot take a correct long term decision. As these groups are desperate to sell, you can buy assets at bargain prices. Conversely, you would not want to buy shares from a seller knowing more than you, because you have probably overlooked some risk.

Oaktree's Howard Marks: What's Ahead for the Bull Market--Knowledge@Wharton

There's only one intelligent form of investing, and that's to figure out what something is worth and trying to buy it for less.

Below are some thoughts, in no particular order...

1. No such thing as timing the market

"I’ve been saying, ‘we’re in the eighth inning’ — for a little while, [but] I realized [...] that there’s one problem with that locution, which is this isn’t baseball and we don’t know how long the game is going to go."

No one knows when the market will crash and the boom will end. You can, however, become more weary when the market has been rising for long and valuations become high. Although this is worth noting, it would still be relatively immaterial for any given investment, if you follow the principle of estimating the value of the business (incorporating a margin of safety) and then buy shares in the company at a discount to value.

2. Random walk down Wall Street

"The current economic recovery is the third longest in history, and if it goes on another year, it will be the longest in history — there’s nothing to say it can’t [keep rising]"

History is important and must be used as a starting point, but occurrences on the market are random. This is because the market is driven by emotions.




3. Corrections not crashes

"Over the previous decade that I lived through, we had lots of minor boomlets and then corrections. Don’t automatically think bubble-crash."

Bubbles don't have to result in a crash. There could just be a stagnation for a very long period of time, or even relatively minor corrections. 

4. Price is king

"People took that grain of truth and they expanded it to mean that … if you invested in an internet or e-commerce company, you’ll probably make a fortune because the internet is going to change the world. And as a consequence, it didn’t matter what price you paid."

"[People said, about the nifty-fifty stocks' prices in 1968,] "if it [is] a little too high, so what? It [is] growing so fast it will just grow into the price,” said Marks. But it turned out that investors who bought these stocks in 1968 and held them for five years lost 97% of their investment. The lesson? “Price does matter"

A bubble is a consequence of excessive excitement which is founded in but not justified by facts. Remember that money is not made during the selling, but during the buying, and if you buy at the right price, the market price will (eventually) converge with that price, provided you were correct. Remember, price always matters.

5. Fantastical and Mythical Stocks

"The anointing of a group of “super-stocks” is a sign of the state of the market. “You can’t have a group treated like the FAANGs have been treated in a cautious, pessimistic, sober market.” That means it’s not a market with good bargains.

Effectively, this refers back to the idea of a grain of truth being taken and then being overused in investment hypotheses. A 'super-stock' is essentially one which the crowd thinks is less subject to the negative cycle of the market, or a company which is revolutionary. However, in most cases, it is a consequence of weaknesses being underestimated or ignored, and the growth story being wolfed down by starving and raving investors. At this point, the market is not pessimistic, and is definitely optimistic or entering euphoria. Although this does not mean you should not invest if you can find a bargain, it means that really good bargains are rare, and that a generous helping of caution would be advisable.

6. Turbulent boons

"Warren Buffett once told Marks that he likes to buy companies when they’re 'weeds, not flowers.' Oaktree also believes in this dictum of investing in troubled assets and selling them for a profit once they recover. 

Often the best bets are struggling companies, because they may be undervalued due to excessive pessimism. Here, it is perhaps important to distinguish between the short and long time horizons. Ideally, you would look for a good company experiencing temporary turbulence. This is because strong underlying economics would allow you to keep the investment in your portfolio for a long, long time. It is important to remember, when making such an investment, that "turnarounds seldom turn". However, if a company is valued below the value you associate with its concrete assets, then it may be a good short term investment as you may be able to make a significant profit when these assets were sold.  The latter of the two is probably less likely to occur, but probably still can.




7. Be willing to lose money to make money

Often people may say, "But shouldn’t investors wait for the price drop to stabilize before jumping in so they won’t be, in Wall Street parlance, catching a falling knife? 'The trouble is that once that happens, then the price would have rebounded,' Marks said. 'We want to buy at a time of upset and while the knife is still falling. I think the refusal to catch a falling knife is a rationalization for inaction.' "

This is why you can't time the market. Determine the value of a company, make sure you know what you don't know, allow for a margin of safety, and when a bargain presents itself, take it! No one can call the top or the bottom. You don't know when the knife will stop falling, and want to get in before it has bounced back and converged with-or surpassed-what you think the fundamental value is.

8. Cycles are love Cycles are life

"Cycles are one of the most important things in the world." (Remember, everything is cyclical!!!)

9. Forecasting Liars

"People who depend too much on cycles coming at set times 'tend to get in trouble because they either anticipate too much or they miss things'."

Remember, NO ONE knows what will happen when or why (what the trigger will be). This is why you cannot time the market and must invest based upon a fundamental analysis of intrinsic value relative to the value indicated by the market price.




10. Easy to understand, but NOT simple to abide by

"Not being very emotional is very useful in the investing world. … You make the really big money in this world by unhooking from the market when it gets up [high], when everybody’s happy and nobody could think of anything that could ever go wrong and everybody thinks that trees could grow to the sky.” That’s the time to sell. When the market collapses and everyone’s pessimistic, it’s time to buy."

Awareness is Godliness

I was browsing on the First State Stuart Asia website, and found some interesting 'insights'...


1. The power of compounding.
Compounding works when returns are reinvested to generate further returns. Well, to put it this way, if you generate a compounded return of 7% for ten years you can double the amount of money you have. Now, if you are also adding more capital to the portfolio on a yearly basis, within a 75 year lifespan, you can work miracles.


... and decided to make note of some of the different influencing factors all aspiring investors should be aware of. It is not possible to prevent the 'biases' referred to below from clouding our judgement, but by being aware of them, we can limit the cloudiness.


2. The 'knew it all along' effect, hindsight bias, and embracing uncertainty.
This is also known as hindsight bias. Things always seem a lot more obvious in hindsight. This is because forecasting is inherently speculative; it is meant to be uncertain. Always remember that ANYTHING CAN HAPPEN; just because its unlikely, that doesn't mean its impossible.

Hindsight bias can be particularly dangerous if your investment goes well. This may result in you being overconfident, and could result in you overlooking potential outcomes. Just because you were right once, doesn't mean you are a good investor! Indeed, sometimes your 'winners' may have been  successful for reasons very different to the reasons for which you invested in that company. When this happens, make sure to compare your predictions with the way in which things turned out. Indeed, all forecasts have 'buts' and 'ifs', and are telling you more about the forecaster than the future.

3. Disposition effect, Self-Attribution and Denial, and Neglect and Breaking even.
i. Disposition effect.
This is the human tendency to sell winners prematurely, thinking that the top has been reached, and the tendency to cling on to poor investments.  Remember, no one knows exactly what will occur; those who say they do, are probably deluded, lying or from the future! Its simple (not)! One option, and arguably a great one, is to pick good companies, and remain an investor for as long as possible.

ii. Self-attribution and Denial.
It is very tempting to claim credit when an investment goes well, and blame luck when things go awry. But, sometimes your 'winners' may have been  successful for reasons very different to the reasons for which you invested in that company. Moreover, as Phil Knight says, "The harder you work, the better your Tao". Overall, on an average measured over 70 years, results will probably be dictated by your efforts rather than your luck. Thus, it would be stupid just to blame bad luck and not recognise losers as material losses. The ideal would be to relish mistakes and successes equally, and to learn from them. Its worth asking 'what went wrong'. At the same time, forgetting that luck was involved in your success (and failure), would be bad too.

iii. Neglect and Breaking even.
People are more interested in investments which are doing well, and tend to neglect underperforming companies in their portfolio. This is ridiculous. When something is not going as you expected it to, you must attempt to understand why. If you do not try to understand why the share price has reduced, you will be unable to notice if there has been a significant change in the business' underlying economics.

You must be willing to acknowledge a failure, if facts invalidate your investment thesis, and not wait for the price to rise up to the purchase price, as there is no assurance that it will. At the same time, if the share price goes down, it doesn't mean the company is necessarily bad, and reacting to movements in share price would be counterproductive.

4. Herd Behaviour
This is essentially a large number of people acting in the same way collectively. This often manifests itself in bubble thinking; people buy when the market is going up, and sell when the market corrects. The latter usually occurs when people realise (in hindsight), that a bubble had indeed formed. Herd Behaviour is driven by emotion, and is irrational. This is because if you really want to make money on the stock market, you have to be greedy when others are fearful and fearful when others are greedy. To paraphrase Howard Marks, you must be willing to catch a falling knife.

Bubble indicators - what to watch out for 

Strong, sustained rallies and stretched valuations (High P/E multiples for example)

Hearing “this time it’s different” (This occurs when people are not being diligent when making decisions)

A flurry of initial public offerings, mergers and acquisitions (People, do more IPOs because valuations are high)

Investor greed and a fear of missing out (FOMO)

Everything moving together, regardless of quality 

Media headlines talking up the latest investment trend

Bibliography
1.http://www.firststateinvestments.com/sg/en/retail/Insights/Behavioural_Investing_Paper_1__The_Power_of_Compounding/

2.http://www.firststateinvestments.com/sg/en/retail/Insights/Behavioural_Investing_Paper_2__Hindsight_Bias/

3.http://www.firststateinvestments.com/sg/en/retail/Insights/Behavioural_Investing_Paper_3__Disposition_Effect/

4.http://www.firststatestewartasia.com/sg/en/retail/Insights/Behavioural_Investing_Paper_4__Herd_behaviour/