Part IV: How to Think About Prices

Mr. Market

You go back to Part 1: http://wp.me/p1PgpH-Zw to reread the two most important chapters ever written on investing: Chapter 8 and 20 in the Intelligent Investor about “Mr. Market” Mr Market by Ben Graham_FINAL and the three most important words in investing, Margin of Safety Chapter 20_Margin of Safety Concept.

Why do people go so crazy? Why does a Mega-Cap like Coca-Cola (KO) become mispriced? Why do prices swing 30% to 50% a year for a relatively stable business like Kimberly Clark or Pepsi? Will I go crazy too? Read about behavioral investing: The_Little_Book_of_Behavioral_Investing_How_not_to_be_your_own_worst_enemy

If you want to go academic then: Amos_Tversky_And_Daniel_Kahneman_-_Probabilistic_Reasoning.

You will need to have the courage of your convictions: http://www.youtube.com/watch?v=KhLDyolExAo. You might even need to remain at peace in the face of extreme events:http://www.youtube.com/watch?v=QY_6de4Tdaw because a BEAR MARKET FEELS like this: http://www.youtube.com/watch?v=bTi5rjJv698. Whatever you buy immediately plummets 10%, 25%, 50%.  Calmly courageous but admitting when you are incorrect in your analysis then acting is what you should strive for. Can you combine a tough combination of courage and humility?

Investing is simple but not easy

Investing is a bit like sex, flying, and climbing. You can read about investing, great investors, study cases, but in the end you must apply the principles to the opportunities around you either today or tomorrow that YOU can understand. As you gain experience, you will understand how you selective you must be–how often do great business go on sale? Think about the prettiest girl at the bar who just says, “NO!” I wish my ex had said nohttp://www.youtube.com/watch?v=ovLzTZEyei8&feature=relmfu

To improve you must rigorously, conscientiously track your results. Actually, few professionals do this, so you will be one step ahead. What advantages and tendencies do you have?  For example, I am so emotional that I sob if a cartoon character gets hurt. Even my nine-year old niece says, “Grow up Uncle John, Don’t you know it is just a cartoon?” What do I do? I do my work and place my orders before the market even opens. I rarely check the market. I have held investments for five to seven years. Time is better spent reading about companies.  Study what wastes time. Hire a Teen for a day to follow you around video-taping your activities for a day or two. You will be shocked at the time you fritter away. What adds value. OK, use common sense. Don’t go to your wife/husband and say, “Dear, just ignore little Billy here with his video camera, this is all in the interests of science.”

Treat your $5,000 in savings as if you would never gain another penny. Write down every reason for why you will buy or not buy a particular company. Build a portfolio carefully. If you want to buy small-caps avoid debt until you gain skill. Reverse engineer prices to tell you what growth expectations the market has for your company. Understand what is, isn’t a good business. Where is the competitive advantage and my margin of safety. Do I have multiple ways to win? If wrong, do I lose 10 cents–but if correct–I win $a dollar?

Teach Yourself to Become a Better Investor

TAKE YOUR TIME. Becoming an expert in anything, dancing, flying, chess, or tennis takes about 10 years of intensive (CORRECT) practice to gain mastery.  Do you think he practices often? http://www.youtube.com/watch?v=gpDdaC1_UGg. Start now http://www.youtube.com/watch?v=gLamA97C14A&feature=related. After two or three years, you will see progress. Don’t give up. Even with many mistakes, Buffett and others have done well. The trick is to avoid the Enrons, Aol/Time Warner’s and other large, permanent losses of capital.

Investment Philosophy

Finally, you will need to develop an investment philosophy like:Greenwald_2005_Inv_Process_Pres_Gabelli in London. Philip A. Fisher wrote a book, Conservative Investors Sleep Well. In Part Three he has a section on Developing An Investment Philosophy. An excellent read. You won’t be successful unless your philosophy, approach, and method fits your personality and circumstances. Market Wizard Author, Jack Schwager, discusses this: http://www.youtube.com/watch?v=8SdHlfsA0P4.

I swear to any reader that with patience and discipline that you can do better than institutional investors. You have many advantages. Also, there are as many ways to invest as there are people. Be the best YOU can be not a poor copy of some guru. Finally, there are no Gurus; no one knows! Beat your own path.

Good luck and let me know your progress and successes.

3 responses to “Part IV: How to Think About Prices

  1. Thank you John, and thank you to the anonymous contributor. Absolutely amazing.

  2. Another great article for readers like me that is starting to invest in the stock market.

    Thank you John.

    • Well, readers have contributed more material to the Value Vault than I have. Plus, many take the trouble to answer other reader’s question with far more insight than this Editor can muster.

      But thanks and let us know how you progress.

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