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Investors need to bear the periodic bouts of downside volatility as the price to be paid for earning superior returns from equities. Time in the market matters, not timing the market. The ability to keep investing at regular intervals, to stay the course through thick and thin, ups and downs, and bull markets and bear markets, and to not worry where the markets are going tomorrow, or next week, or next month is what matters. Simple. It’s simple but not easy.
People have different tolerance levels for downside volatility—when they think about big market falls and when the market falls actually happen. (All investors should study Morgan Housel’s Motley Fool article titled “The Agony of High Returns.”)8
The hard reality is that the stock market will do what it wants when it wants. Investors should not obsess over high-frequency macro indicators. Simply focus on individual businesses and their industry developments. That’s the best one can do. Nothing more. Always remain humble and be intellectually honest.
You may get zero ideas in a year during periods of market frenzy, but it is better to be patient than poor. There are times to make money—and times to avoid losing money. The market is a great leveler. A sudden crash puts
Businesspeople and investors tend to ignore these words and never give up on their pet projects and favorite stocks, even when it makes no sense to continue. They keep throwing good money after bad, or they keep averaging on the way down in bad businesses. They follow the same approach until they go broke.
To succeed in the market you must have discipline, flexibility, and patience.”
Cash will always prove to be valuable on occasion, but over a period of twenty to thirty years, the drag on portfolio performance from holding cash will be much more significant than the few occasional benefits one would get from taking advantage of any periodic downturn with “dry powder.” John Templeton’s saying on the subject of “when to invest” is one of my favorites: “The best time to invest is when you have money. This is because history suggests it is not timing which matters, but time.”
The key to wealth creation is to buy high-quality, growing businesses at reasonable valuations and then just sit on them for a very long time. If you take any random sample of a hundred successful investors who have compounded their capital at a healthy rate for a long time, you will invariably observe that almost all of them would have bought some great businesses and then just sat tight on them. As Munger says, “The big money is not in the buying and selling, but in the waiting.”
Quality of life is a better way to measure winning and losing. It is a welldocumented fact that stress is a killer. Investors often talk about risk-adjusted returns but rarely about stress-adjusted returns. In my view, the latter matters more. Sleeping well is more important than eating well. Avoid shorting stocks. Avoid taking on personal debt to buy stocks.
Some evidence points to look for: excessive valuations, corporate governance concerns, a sharp slowdown in growth rates, loss of competitiveness as reflected in declining market share and falling margins, and loss of bargaining power with customers or suppliers as reflected in deterioration of the working capital situation. It is perfectly okay to be wrong, but it is not okay to remain wrong. One of the great lessons I have learned over the course of my life and investing career is this: if you want to win better than the rest, you must learn how to lose better than the rest. I am happy to
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A s investors, we are in the business of intelligently allocating capital. With limited capital at our disposal and several alternatives, the critical concept of opportunity cost arises. An opportunity cost is defined as the value of the second-best opportunity, which we forgo when we make a choice.
If I am going to add a new position to my portfolio, it needs to be “significantly better” than what I already own. When we are truly disciplined and highly demanding in the required hurdle rate for incoming ideas, then the best stock to buy at any given time is usually among the ones we already own in our portfolio. Don’t diversify just for the sake of it. Avoid adding anything to your life, your investment portfolio, or your business unless it makes them better.
We make decisions every day about how we spend our time, money, brainpower, and energy, and for every decision we make, there is an alternative that we didn’t choose. And it is the choice not taken that represents our opportunity cost. All rejected alternatives are paths to possible futures in which things could be better or worse than the path we chose. Every decision commits us to some course of action that, by definition, eliminates acting on other alternatives. We always have an opportunity cost when we make choices.
In essence, you make your choices, and then your choices make you. Every decision, no matter how slight, alters the trajectory of your life. Every choice’s compound effect is in action all the time. Your life today is a result of your past choices. Hard choices, easy life. Easy choices, hard life.
Investing is nothing but deferring gratification today to consume more at a future date, and opportunity costs lie at the heart of investing.
Sector leaders in a niche area are promising investments, especially if they are identified at a small market-cap stage. Their products usually enjoy premium pricing and the brand tends to become synonymous with the product category. Think Eicher Motors in leisure motorbikes, Symphony in air coolers, or Page Industries (Jockey India) in underwear.
Newton’s first law of motion states that an object in motion stays in motion. Things in motion possess inertia. The stock market is characterized by an analogous property; a trend in force tends to remain in force until something occurs to change it. In other words, the trend is your friend.
According to Adam Parker, former U.S. equity strategist at Morgan Stanley, the impact of sector-specific factors on a typical stock’s annual return accounts for more than half of a stock’s performance. Based on my personal investing experiences over the years, I have found that it is better to buy a good company in a great sector than a great company in a bad sector. In
my portfolio holdings: 1. Revival of the Indian pharmaceutical, automobile, camphor, and quartz surface industries: Alembic Pharma, Laurus Labs, Suven Pharma, Anuh Pharma, Strides Pharma, Solara Active Pharma, Granules India, Shilpa Medicare, Dr. Reddy’s, Ajanta Pharma, Aarti Drugs, Medicamen Biotech, Rajratan Global Wire, NOCIL, Mangalam Organics, Pokarna. 2. Gradual shift of chemicals manufacturing away from China and toward India: Dai-ichi Karkaria, Valiant Organics. 3. Secular growth of animal healthcare industry, digital adoption, and cloud computing: Sequent Scientific, Hester
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Lucky people are those who acknowledge just how fortunate they are and feel grateful for what they have. If you want to feel rich, just count all the gifts you have that money can’t buy.
The Big Investing Lesson from theBhagavad Gita Karmanye vadhikaraste, ma phaleshou kada chana. Ma karma phala hetur bhurmatey sangostva akarmani. —Bhagavad Gita In this verse from the Bhagavad Gita, Lord Krishna explains to Arjuna that he must perform his duties, as the latter was unwilling to fight the Mahabharata war. Translated, it reads: You have the right to perform your actions, but you are not entitled to the fruits of the actions. Do not let the fruit be the purpose of your actions, and therefore you won’t be attached to not doing your duty.
Whatever the future holds, we will stick to our process. We are not guaranteed of getting what we want all the time—far from it—but we believe it is the best foundation for getting what we want over time. —Chuck Akre
Although the returns (outcome) may be evident for everyone to see, investors rarely ask whether that outcome was the result of skill (a sound investment process) or plain randomness. If you focus only on the outcome, you are less likely to achieve it. Instead, if you focus on adhering to a sound process, the outcome will take care of itself in the long term, although the short-term results almost always will be driven by luck. Over the long run, a sound process can be counted on to deliver desirable results in a sustained manner and produce more reliable outcomes.
You can borrow someone’s idea, but you will never be able to borrow their conviction. Hard work has no alternative.
Another common and highly irrational anchoring bias among investors occurs when they aim to buy a stock, which they expect to go up “hundreds of percentage points” over time, only at an arbitrarily fixed desired purchase price that is a bit lower than the current market price. These investors act penny wise and pound foolish and end up incurring huge opportunity costs in many cases (similar to those who defer a justified sale of a stock solely to make it a long-term holding and save some short-term capital gains tax). For the great majority of transactions, being stubborn about a tiny
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A common anchor is the original cost price of a stock, which makes investors hang on to loser investments in the hope of exiting once they break even. These investors overlook Phil Fisher’s warning on the huge costs of this bias: More money has probably been lost by investors holding a stock they really did not want until they could “at least come out even” than from any other single reason. If to these actual losses are added the profits that might have been made through the proper reinvestment of these funds if such reinvestment had been made when the mistake was first realized, the cost of
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Another faulty anchor is the past price of a stock—that is, the point at which an investor originally contemplated buying it but failed to pull the trigger, after which point the stock has appreciated significantly. Missing out on an early opportunity creates regret. That regret often is unwarranted because, for a truly outstanding business, multiple opportunities to buy the stock exist. By definition, a hundred-bagger is a ten-bagger twice over. Even if someone bought it after it became 10×, it still went up another 10×. This
One of the most counterintuitive ideas in investing is averaging upward, or adding to a winning position (also known as pyramiding). If we are invested in a great business that will be worth several times its current market cap (over time, an investor’s mind evolves into thinking in terms of market cap rather than stock price) in the medium to long term, then we must not hesitate to add more shares at a higher (sometimes much higher) price than our original cost basis. Our focus as investors should always be on expected returns based on the current price.
Envy is the only one of the seven deadly sins that offers no upside. Envious people are always miserable, because envy has only downside risks and envy offers no upside reward. We are unnecessarily influenced even when others are playing a different game than we are. Do not compare yourself with others. The only person you need to be better than today is the person you were yesterday. Competing with others makes you bitter. Competing with yourself makes you better. Great wisdom can be found in Ernest Hemingway’s words: “There is nothing noble in being superior to your fellow man; true nobility
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Successful investing is investing that lets you sleep peacefully at night. Success is not about who makes the highest returns or who makes the most money. It is about achieving our financial goals in a timely manner with the lowest possible risk. When practiced in a truly honest and sincere manner, value investing not only leads to great wealth but also makes us better human beings. With the passage of time, we learn to recognize that value investing is not merely about stocks and business fundamentals. It is a life discipline.
Emotions and expenses are two of the biggest enemies of an investor, and in several instances in my investing career, I paid the price for getting overly emotional about the individual at the helm of a company and acting on my subjective opinion.
A remedy to stress-influence tendency is to delay making decisions until the time at which you feel less stressed. Give yourself a cooling-off period and take stock of the situation when you are feeling calm and relaxed. And then, peacefully think over your decision. Ensure that you refer to your checklist if it is a critical decision.
Loss aversion. Human beings are more motivated by the thought of losing something than by the thought of gaining something of equal value. This is especially true under conditions of uncertainty. The threat of potential loss plays a significant role in our decision-making, and we have a natural tendency to be loss averse. Or, in Munger’s words, “The quantity of a man’s pleasure from a ten-dollar gain does not exactly match the quantity of his displeasure from a ten-dollar loss.”7 This is the foundational principle of Daniel Kahneman and Amos Tversky’s prospect theory (figure 31.3).
Framing is an outcome of our aversion to losses. Evolution has programmed our brain to seek loss minimization instead of gain maximization. In investing, narrow framing, a variant of the framing effect, is our inability to zoom out in a given situation. We like winning more than losing, and we keep an internal score for each stock in our portfolio. We maintain a separate mental account for each of our stocks, and we want to close every future sale transaction only with a gain. Instead of looking at overall portfolio performance, we try to gain from every single stock. This narrow framing is
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Investors should learn the big lesson from Buffett’s insurance underwriting practices: always think in terms of expected value. Be risk averse but do not be loss averse, that is, do not be afraid to take calculated risks. Investing is not a business in which every investment is profitable. Most investors find this to be decisively true but difficult to accept. If you are obsessed with individual wins and losses, then you will end up being miserable even if your overall portfolio performs well. Occasional losses are part of the game, so diversify prudently to ensure that no single loss has a
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The degree of one’s emotion varies inversely with one’s knowledge of the facts—the less you know, the hotter you get. —Bertrand Russell
cautionary words of both Benjamin Graham (“Operations for profit should be based not on optimism but on arithmetic”) and Louis Brandeis (“Remember, O Stranger, arithmetic is the first of the sciences, and the mother of safety”).10
Albert Einstein had said, “Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it.”
“The investor’s chief problem—and even his worst enemy—is likely to be himself.”
There are no mistakes in life, only lessons. When you adopt a positive mind-set, you never lose. You either win or you learn. Good judgment comes from experience, and experience comes from bad judgment. (I have had a great deal of experience.)
Making quick money through a lucky trade early on is the worst way to win. The bad habit that it reinforces often leads to a lifetime of losses. Beginner’s luck often turns out to be beginner’s curse in the field of investing.
Are you creating habits and taking actions that will support your body and mind for the rest of your life? Are you putting systems in place so you can spend more time on the things that really matter to you in your life?
Being successful doesn’t mean only making truckloads of money. Money without health is pointless. Money with no good relationships will leave you lonely. We spend a lot of time focusing on compounding our financial capital, but we overlook the fact that social and intellectual capital also compound. Investing in yourself, in your relationships, and in your understanding of the world pays massive dividends over time.
Whatever the mind of man can conceive and believe, it can achieve. Thoughts are things! And powerful things at that, when mixed with definiteness of purpose, and burning desire, can be translated into riches. —Napoleon Hill
Your mind is like an empty glass; it’ll hold anything you put into it. You put in sensational news, negative headlines, talkshow rants, and you’re pouring dirty water into your glass. If you’ve got dark, dismal, worrisome water in your glass, everything you create in your mind will be filtered through that muddy mess, because that’s what you’ll be thinking about. Be conscious of your information diet. Acknowledging the good that you already have in your life is the foundation for all abundance. —Eckhart Tolle
The world looks, acts, and responds to you differently when you have an orientation of gratitude for that which you already have. When you appreciate, optimize, and leverage what you do have instead of ruminating over what you don’t have, you have the power to change your circumstances.
Our attitude determines our altitude.
Try to read or watch something productive or inspirational before going to sleep. The mind continues to process the last information consumed before bedtime, so you want to focus your attention on something constructive and helpful in making progress with your goals and ambitions. This ensures that you finish strong every day. The
Nothing in the world can take the place of persistence. Talent will not; nothing is more common than unsuccessful men with talent. Genius will not; unrewarded genius is almost a proverb. Education will not; the world is full of educated derelicts. Persistence and determination alone are omnipotent. —Calvin Coolidge
Whenever you think that some situation or some person is ruining your life, it’s actually you who are ruining your life. It’s such a simple idea. Feeling like a victim is a perfectly disastrous way to go through life. If you just take the attitude that however bad it is in any way, it’s always your fault and you just fix it as best you can—the so-called iron prescription—I think that really works.2
