Basic Investment Philosophy I
After spending a couple of years intensively reading about and practicing the art of investing I have come to accept the following tenets:
- Forecasting the stock market is not possible,
- Forecasting the earnings for individual companies with any sort of accuracy is not possible, and
- The EMT (efficient market theory) is bunk.
Fully accepting the implications of these three statements and building and implementing an investment stratey around them is the challenge, and I find it an ongoing intellectual battle.
Zweig and Montier have led me to appreciate the behavioral school of investing. As I reflect on my own investment decisions over the past several years I have to conceed that, like most of the rest of the species, I seem rather poorly equipped emotionally to make sound investment decisions. We humans appear to be programmed to use our emotions rather more facilely than our cold intellect in the investment decision-making process, while at the same time ignoring, or even denying it.
OK. So where does that leave us? or me, at least.
First, what really works in investing? Strangely enough we have some simple answers to that question. [Tweedy Brown has a nice little collection of essays, entitled appropriately “What has worked in Investing”, that I highly recommend]. All indicators seem to point to stock selection based on low price earnings multiples and low price to book value multiples. Yet the real conundrum is why this strategy apparently continues to work if everybody knows about it. It’s simple, it’s been around for ages, at least 50, 60, 70 years or more thanks to Ben Graham, available for all to use, and yet it still appears to work over the long run. Maybe that’s it… over the long run.. is not a concept that we humans appreciate; do we all have the attention span of an butterfly?
So my challenge is to find a strategy ‘that works’ and implement it with the discipline necessary to completely eliminate the emotional contaminants that undermine successful investing. That said, I’m not a quant and I don’t want to become one. No ‘black box’ investing for me. I enjoy the ART of investing, and I want to continue enjoying it.