Developing an investment philosophy

Developing an investment philosophy

That was an interesting review by Chetan Parikh on Scott Kay's book: Five Key Lessons from Top Money Managers ( Same book as reviewed by Mr.Parikh in his previous write-up: Buying quality businesses at reasonable prices )

Here are snippets from Mr.Parikh's write-up (in dark blue italic):

When you filter out companies based on objective standards, you will likely exclude firms that turn out to be good investments. That is not a problem. You are not trying to develop a philosophy that iden­tifies every good investment; rather, you want to build a philosophy such that every investment it identifies is good. For example, assume the universe of superior investments consists of one hundred busi­nesses. Your selection criteria filter out eighty of those companies, along with thousands of bad ones. As long as the twenty firms that pass muster are quality selections, you have accomplished your goal of constructing a portfolio of winners.

(Hmmm... You are not trying to develop a philosophy that iden­tifies every good investment; rather, you want to build a philosophy such that every investment it identifies is good.

Yup, I believe that this is a good point to remember. One cannot pick and call each and every single big winners in the share market. It is simply not possible. But what is more achieveable is building a portfolio in which ALL the investments are deemed as good. )

If you purchase a stock that doesn't meet your buy criteria, how will you know when to sell it? When everyone else decides to sell it? When its price drops a certain percent? A lower price might ac­tually make the security more appealing instead of turning it into a sell candidate. You leave the realm of investing to speculate when you violate your investment philosophy.

(hmm... see the issue of not letting the LOW PRICE influence your investment philosophy?

Stocks more often than not will most likely suffer a huge drop in stock prices when their earnings or business fundaments decay.

A purchase in such stock will see the investor 'leaving the realm of investing to speculate'.

And the success of such stock purchase would more likely then not to depend on the bouncbackability of the stock rather than due to fundamental reasoning.)

Rather than base their decisions on objective criteria, individuals often buy and sell solely because of the opinions of others, again moving them from investing to speculating. Accepting someone else's analysis is fine if you understand and agree with his or her philoso­phy. However, most people don't know the reasoning behind a rec­ommendation when they embrace it.

(hmmm... investing is not a game of follow you, follow me isn't it?)

An investment philosophy anchors your decision making and sta­bilizes your portfolio during turbulent times. It acts as both a map and a compass that provide direction and guide you through stormy in­vestment markets. Great investors do not change what they believe to match whatever is popular. They are willing to risk missing a good investment to avoid bad ones.

(hmmm.... willing to risk missing a good investment to avoid bad ones.

Ah.. the issue of Missing a good investment....missing out on good opportunities...

er... aiyah! Missing out on a chance to make moola lah.

It's no sin to miss a great opportunity outside one's area of competence. (W.Buffett, 1999 Annual Report)

Think about it.

A trader has their own ways in making their moola. A good speculator simply knows how to speculate and make moola their own way. An investor has their own way too.

Simply put: Your way? My way? High way? No way? It simply does not matter.

Most important is that we go our own way that we know the best (most important key issue here is that we really need to make absolute sure of our way!) and not try to imitate other ways for we might not fully understand the potential pitfalls in other way(s).

Think about it this way.

A fisherman knows best how to fish and a tiger hunter knows best how to hunt a tiger. Do you think it is wise for ze fisherman to ignore what it knows best and embark on a tiger hunting mission?

Wouldn't it simply be better for the fisherman not to be foolish and embark on a bad and deadly venture such as 'whacking' tiggers?

So if you see someone making good making great moola in investing... do try to understand the pitfalls in investing before you decide to embrace it. Vice versa in trading, yes?

And lastly, I think it's good to remember the following:

Great investors do not change what they believe to match whatever is popular. They are willing to risk missing a good investment to avoid bad ones.