I have never been a good investor. Since the day I started working, I had been through at least two or three recessions. In every of those recessions, I'd always stayed out, not wanting to log into my account to see the red indicators of the counters.
You'd think that people working in financial services will be more astute in terms of their judgement of public equities - what's undervalued or overvalued. But truth is: we know nothing about how public markets really work.
"The role of financial markets is to take money away from mediocre and underperforming companies and put it in stable, growing, high return on capital companies. "
Low risk investments such as fixed income instruments have an important role to play in the world of money management, especially when it comes to managing billions of dollars over long periods of time.
"Almost all of the real money made in those areas is made only by extremely patient investors who invest once every ten or twenty years, liquidate their holdings once a decade and spend long, long periods of time in cash.”
And when it comes to stock valuation, there are numerous scientific methodologies to calculate what the true value of a company is. But none of those scientific approaches guarantee any success in getting positive returns.
"Trying to invest in those companies based on an analysis of value is more likely to result in opportunities missed than it is make money. An approach that is much more likely to be successful is:– Investing in high quality companies after a market decline of thirty percent, and retaining the liquidity to build positions in those companies after a fifty percent decline in the broad market averages. That takes extraordinary patience, which is a matter of personality."
The goal is to be "liquid at the bottom" because "business cycles are primarily caused by the creation and destruction of debt. Those are functions of greed and fear, in other words of emotions."
It is said that "a long-term investor must be a patient person. A short term trader who thrives on, perhaps needs, constant activity is likely to be an impatient person."
I believe that Investing is an extremely and deeply personal thing. It's all about managing risk. Risk appetite is subjective. Each person can only figure what that is for himself/herself. No one else can do that. Once again, this is a personality issue.
This is also the same reason why I do not believe in seminars and workshops that preach about obtaining wealth by punting in stocks. I have nothing against the technical aspects (charting, valuation and analyzing financial reports). But in most cases, it tends to always be about extrapolating the future, which no one really knows.
"Successful investors...incorporate into their investment strategy, clear concepts of acceptable risk, what constitutes an acceptable level of inactivity and length of holding period after funds are committed. And successful investors stick to their strategy. That strategy – for instance sitting on cash, sitting on losing positions, sitting on winning positions — must be based on self-knowledge. If the strategy is out of sync with the personality, it won’t work, no matter how well it has worked for others."
[Takeaways, excerpts and quotes adapted from here.]