Investing with Prudence

Author: arif   |   Latest post: Tue, 14 Nov 2017, 11:02 PM


Emotional Challenges to Rational Investing - Part 3

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This is my third instalment on the same topic I wrote last week

I began to seriously seek deeper and more thorough understanding of the stock market. I humbly read blogs, articles, books and hopped from one site (this website included!) to another to accomplish my mission. And I tried my best to dump all my prejudices and pre-conceived ideas. This, as always, is easier said than done - certain ideas and biases, I admit, stubbornly persisted in my head!

In this journey, I came across surprisingly very diverse views. I used to assume that everybody else in the market thought the same way I did, or at least not so differently. How wrong I was! All this while I read and heard others, but I didn't actually 'listen'.

There are indeed very different people in the market, some of them poles apart from the others.  Their views; their motives; their emotional, mental and financial profiles; their thinking process; the market theories they adhere to; the tools they use; their ideologies and value systems - all these and many others impact their respective behaviour in the market. And the market behave as the composite sum of the actions of all these partcipants.

I read the views of the investing gurus abroad and of some local prolific writer investors (notably Calvin Tan and KYY). I even read short comments by many others on this site and elsewhere. While I may disagree with some of what I read or at times doubt their motives, I must thank them all because those materials they wrote helped me gain some feel of the market and understand market participants better.

But no one impressed me more than Warrent Buffet. I heard of him before of course, but I never bothered to study his ideas.

In my younger days I tried to read Einstein - actually, about him, since his ideas are not really digestible by laymen like us. It made me feel very small as I could hardly understand even a tiny fraction of his ideas and his reasonings. The subject (largely theoretical physics) is immeasurably beyond my reach. In fact, it is beyond common sense, literally. My only comfort was that  people much smarter than me, including those even trained in the related discipline, also struggled at that.

But Warrent Buffet is a different case. Here's a man I can understand saying something most people can relate to! I see a man with abundance of deep insights and clear thoughts; refreshing perspectives, impeccable integrity and enormous self-assurance - yet genuinely humble, down to earth and obviously realistic. The gems of wisdom he rained, the reach of his sight, and the simpleness of it all just struck me. I see a congregation of the finest qualities in a man that many others could only dream of having.

There are undoubtedly many other great investment masters. But I think Buffet is in a class of his own. Just as there are many great sportsmen - from Ronaldo to Bjorn Borg to Tiger Wood. But the world will most probably need to wait a very long while before another Muhammad Ali or Diego Maradona emerge.

Buffet views investing differently from the rest. He views market prices, company valuation, risk (and its measurement), corporate governance, executive compesation, and even certain acounting treatments quite differently from many of us. Some of his views ruined my long-held understanding about investment.

For instance, many among us faithfully accept the text book meaning of risk as the volatility in prices and measure risk by looking at the standard deviation from the mean. But he sees it very differently. He sees risk as the probablity of losses or injury. To him, the risks of investing in a company does not come from price fluctuations but from the business fundamentals of the company. And to him, the risk is also related to the price level at which you buy the stocks. At a lower price level, the risk is lower since the possibility of better reward is higher irrespective of historical price volatility.

In the beginning I was unsure whether those principles would also apply to an emerging market like ours. Or whether those ideas would be relevant for small investors investing only a tiny bit as against the mountains of funds Bershire Hathaway has.The more significant issue was: how do I apply his principles in investing real money when I only knew and understood so little? 



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