Time has a way...

To use the title of Aswath Damodaran's book on corporate valuation, investment decisions should be based on a combination of "Narrative and Numbers". In order to start developing an understanding of the numbers side, I recently took a super interesting Coursera course on financial accounting!

Near the start of the course I realized that non-cash items such as depreciation, amortization, and bad debt expense add artistic elements into accounting. Managers can legally get creative with accounting? What? My reaction exactly: the thought that the numbers published in an annual report present a twist on reality (and not reality itself) worries me.

But as I went through the course, I realized that this is partly because the future reality is unknowable till it happens. More importantly, I learned that provided the books are not cooked, time has a way of revealing and ironing out adventurous, aggressive accounting; if you don't account for non-cash items sufficiently, you will have to take write downs on assets in the future. (And similarly if you are too conservative, the expenses booked today will reduce future expenses.) Time just has a way...

So what did I take away? There are three things that were reinforced for me: 

• Time has a way of setting things right.
• One must carefully evaluate a long term track record. 
• You have to trust that the managers' interest is aligned with yours.

Invest with the Dao

I recently took a course on Daoist Thoughts. Daoism, for those who don't know, is a thought-process which emphasizes the importance of leading a simple life in harmony with nature, and not resisting the dao (the way of nature). The concept at the heart of Daoism is wuwei: action in inaction. This is somewhat like the idea of Going with the flow and involves taking only those actions, which are suited to the circumstances.

With the summary out of the way, I can get to the connection between Daoism and investing, which I wished to highlight. In the manuals on wisdom produced by Daoists, we are repeatedly told that rather than impose a plan or model on a situation, we should let others act frantically, and then lightly adjust ourselves as we see the direction that matters have evolved in. Investing is, above all, a test of our equanimity. So, it seems to me, that we investors must master the art of wuwei; the idea of achieving the greatest effects by a wise strategic passivity is at the heart of long-term investing. Hence the Mungerism: The big money is not in the buying and selling, but in the waiting.