September 2, 2007

Assumptions and beliefs

I read somewhere that all of us have a set of underlying assumptions based on which we create a model of the world. This model involves all aspects of life, but I will restrict myself of investing.

I am aware of a few assumptions on which my investing style or philosophy is based. These assumptions are not universal truths or applicable to others. Its just that I have developed these assumptions over a period of time. Some may be valid and some not. I constantly test these assumptions against my performance and try to discard those that work against my long term performance.

So here goes my list

1. Value investing is an extremely productive approach to investing for my circumstance. I have a regular job, a family and can devote only a limited time to investing. So for me value investing and an as an extension, buy and hold makes sense.
2. Trading is time consuming, too stressful and not a game in which I can or want to excel. In addition, I have a mental block against trading (which must quite obvious). I am currently reading a great book on trading – Way of the turtle (on which I will post next) to learn more about it. My initial reaction – Trading is not for the faint hearted, is a tougher (especially emotionally) way to make money and definitely not a part time activity.
3. Investment advice especially from analysts and financial website is baised and not worth following. Blogs are a different matter as the bloggers do not have a hidden agenda.
4. It is impossible to predict the markets in the short run. Don’t waste energy on that. Time is better spent in learning other aspects of investing
5. One can get better at investing if one is ready to put the effort into it.
6. Avoid options, derivatives and other avenues such as gold as there are enough opportunities in equities. No point in spreading my self thin. Knowing a little bit of equity, a little bit of commodities and gold will not get me superior returns. Focus on one area and do well in that.
7. Avoid stocks with high PE unless I am very very certain of the business prospects. Avoid stocks above a PE of 20 in most of the circumstances.
8. Avoid IPOs (see my
logic here)
9. Investing in not an intrinsic talent usually. There are a few exceptions to it like warren buffett. I can learn to be a better investor.

I am a buy and hold investor. This has been gospel for me in the past. I guess if you follow warren buffett as much as I do, you end up following his philosophy completely. However over the past 1 year I am trying to expand beyond this approach. I would still prefer to buy and hold stocks for which the instrinsic value is increasing rapidly. However I have started looking seriously at a few more approaches such graham type deep value investing, special situations and also looking at how momentum may be combined with value investing . My core philosophy is still value investing, however I am trying to expand the scope.

1 comment:

starjourno said...

It is really the right stratergy. Many people in India with lot of greed lost their hard earned money when market forces tempted them or lured them. Looking at long term in equity markets is exactly the thing that one should do. I appreciate you for doing and guiding in that direction.