Admitting to speculation in the financial markets, be it in bonds, equities, derivatives, mutual funds or even real estate, is akin to labelling one-self a gambler; highly unlikely and not something you’d like your family to know about. And yet, for most individual (and numerous institutional) market participants this is what they truly are, like it or not.
Investors, on the other hand, are few and far between. These folk stand out from their apparent peers in a number of ways. As the father of value investing, Benjamin Graham so wisely put it in his seminal 1934 work “Security Analysis”:
"An investment operation is one which, upon thorough analysis,
promises safety of principal and a satisfactory return.
Operations not meeting these requirements are speculative."
Taking the time to reflect on these words and evaluating our “investment” process against this benchmark will likely yield rather surprising results. After all, do you perform thorough analysis prior to making your asset allocation decisions?. Or are you more likely to fall into one the following usual patterns?.
1. Buying fads – e.g. Getting into internet stocks in the summer of 1999 for fear of missing out on the next Cisco?
2. Acquiring real estate on the premise that houses are the safest asset and “never lose value”
3. Letting your local bank branch manager talk you into the flavour-of-the-month fund
4. Trading in and out of stocks rapidly on the basis of CNBC sound-bites
5. Equating price with value and therefore allowing the mood of the market to determine your purchase and selling decisions
I, for one, admit to having been on at least 3 counts of the list of 5 above. Fortunately for me, the last 10 years have served to transform a once clueless speculator into a reflective investor. If nothing else, at least the relentless haemorrhaging of hard earned savings that were the hallmark of my early efforts in the markets, has now stopped and in fact been it has replaced with modest positive returns.
So, what essentially does it take to join the ranks of the few true investors, so to speak?. How does one evolve from mindless gambler to “thoughtful investor”?; to paraphrase the title of yet another classic investing book (1949) by the ubiquitous Mr. Graham. Well, as is the case with most addictions, it starts with admitting the error of our ways. As we established on the very first lines of this post, no one likes to be labelled a speculator for it has almost immoral connotations. Nonetheless, failing to take this first step will stand in the way of the learning process that is required to reach the investing holy grail.
Assuming, that pride has been swallowed and the cold realisation of our dreaded speculative persona has set in, we are now ready to get on the investing track!. Here’s how I’ve approached it (and continue to do so to this day):
A. Read what the masters have to say (anything by W. Buffet, S. Klarman, P. Lynch, P. Fisher, B. Greenwald, J. Greenblatt, M. Whitman)
B. Ignore the crowd. Easier said than done but it can be accomplished once you realise that 95% of market commentators really have nothing of interest to say
C. Think of securities as part-ownership claims on real businesses, and act in a business-like manner in your investment decisions
D. Do your homework. Research your likely targets as you would any other decision entailing material financial risk
E. Frame your goals around risk and not returns. Minimise loss potential before concerning yourself with upside.
I hope these reflections prove useful over time and help you make the transition.
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