Publisher’s Note: This is the fourth in a five-part series that analyzes investing from an entrepreneur’s point of view. At the end of the series, the collected columns will be available for download as a consolidated white paper at www.sbnonline.com.
I like a concept referred to as value cost averaging. Under this approach, I find investments that meet my value criteria while adding to my position if and when they become a better value because of market volatility or changes in the underlying business. Having some available liquidity is necessary to take advantage of opportunities as they arise.
In his book review of Janet Lowe’s “Damn Right! Behind the Scenes with Berkshire Hathaway Billionaire Charlie Munger,” Joseph Dancy says, “’Volatility over time will take care of itself’ according to Munger, provided favorable odds exist that the business will grow.”
Because I really enjoy investments, I’ve spent a considerable amount of time reading, learning and studying the topic. I start my daily studies early in the mornings — usually around 3:30 a.m. — before my workday begins.
A major reason why I like the public market is that it’s a combination of economics and psychology.
Understanding economics is very important. But understanding people and human nature is equally if not more important because markets tend to overreact with both good and bad news. Remember that stock markets are always shifting between greed and fear.
Consumer confidence also has a significant impact on both consumers and businesses. Economy and consumer confidence are interrelated because of the multiplier effect, which simply means money gets circulated many, many times around.
Being an innovator in investments is not necessary. Instead, one can follow the many successful investors who have long-term track records, strategies and styles. There is nothing wrong with learning from other people. We don’t have to be pioneers. Find successful investors, learn from their successes and failures and apply part or most of their approach to what you are doing.
Co-investing is a strategy that can work. For example, if you like Warren Buffet’s style, track record and investments, buy Berkshire Hathaway. If you like Dan Loeb, Dave Einhorn or Carl Icahn, buy stocks that correlate with their investment strategies.
If I had to pick one investor who has had the longest track record of an investment style that is intriguing yet simple to understand, I would pick Buffet. While simple to understand, effective execution is another matter due to the dynamics of human nature, including fear and greed. Buffet gives a tremendous amount of credit to his Columbia University professor Ben Graham, who many consider to be the guru of value investing. His book, “The Intelligent Investor,” while originally published in 1949, is as relevant today as it was 65 years ago.
Graham says simply to try “to be less irrational than the mass of speculators who insist on buying after the market advances and selling after it goes down.” He talks about indifference to market fluctuations. The intelligent investor “buys carefully when he has money to place and then lets prices take care of themselves.” He says the investor “must deal in values, not price movements. He must be relatively immune to optimism or pessimism …”
Next month: Part 5 – The wonder of compounding
