Investing Principle..

My 15th 1998, Adam Smith had an interview with Warren Buffett in his Money Game

The below posting is based on the transcripts of that interview.

Investing principle.

• I've applied Ted Williams' theory on hitting to investing because Ted Williams, in his book The Science of Hitting, carved the strike zone up into 77 cells. In fact, he's got a diagram in the book. And he says if he swings only at balls in a certain cell, right in the middle of the plate more or less, he'd bat .400, but if he swings at balls in the worst cell, which is the lower outside corner, he'd bat .230. So he says the most important thing in terms of being a good batter is to swing at good balls. And in investing, it's the same principle.

And yet again, Buffett preaches the commonsense thing, play only when winning it's easier! That baseball example might perhaps be difficult to understand... err... so I guess it is time for my Granny tales. LOL! Yeah, let's put it into my Granny's perspectives.

Now my Granny simply loves playing either Mahjong or Dead Rummy. Now she really excels in the game of mahjong, especially the 3-legged mahjong, in which I would say that she wins probably 7 out of 10 times whenever she plays. Her winning average is about 70%. In the game of dead rummy, she ain't as hot. (not so geng wor!) She has probably a winning average of about 30%. And because of her knowing exactly what she's good at, she always, always insist to play the game of 3-legged mahjong, because she knows winning is much easier for her.

So what about me?

Me? LOL!.. Firstly, I am good at Dead Rummy and my best strategy is to avoid her at all cost at the mahjong table and wait patiently to play Dead Rummy with her. LOL!.. yeah, I am indeed being very snake here (ho ho ho) but by playing only Dead Rummy with my Granny, I know very well that I am playing my best game verus her worse game. Won't this improve my chances of winning? (else? I will be slaughtered at ze mahjong table and be ze water fish!)

And if that make sense, shouldn't we apply it to the share market? If we are good at punting, stick to punting. If we are good at trading, stick to trading. If investing is our forte, stick to it!

Let's talk about investing. Now there are going to be instances, when one will be unsure about the buying opportunity. So perhaps it is not a bad idea to follow Buffett's advice of being patient and waiting for the best, clear-cut investing opportunity before purchasing a stock. Example, say a company embarks on a new project. Will it be successful or not, will always be a difficult thing to judge. To base the investment on such an event is probably a speculation, in which there is always a chance of us being wrong. (or should I classify this as another Things Not to Ass-u-me?.. :p)

And my favourite part of the interview - why do smart people do dumb things! ...

• ADAM SMITH: For example, here's a statement -- why do smart people do dumb things?
• WARREN BUFFETT: That's the big question. Why do they do it in investing? Why do they do it in managing businesses? Because you have all these smart people out there. The money doesn't go to the people with the highest I.Q. There would be a very poor correlation between I.Q. and investing and results. And you say to yourself why does somebody with a 500-horsepower motor only get 100-horsepower out of it? And I would say that if you look at the intellect as being the horsepower that's available, but you look at the output as reflecting the efficiency of that motor, it is rationality that causes the capacity to be translated in output.
  Now what interferes with rationality? It's ego. It's greed. It's envy. It's fear. It's mindless imitation of other people. I mean, there are a variety of factors that cause that horsepower of the mind to get diminished dramatically before the output turns out. And I would say if Charlie and I have any advantage it's not because we're so smart, it is because we're rational and we very seldom let extraneous factors interfere with our thoughts. We don't let other people's opinion interfere with it. We don't get-- we try to get fearful when others are greedy. We try to get greedy when others are fearful. We try to avoid any kind of imitation of other people's behavior. And those are the factors that cause smart people to get bad results.

Ah, see how Warren explains how emotions with rationality and Warren explain his advantage is because they are rational and they very seldom let extraneous factors interfere with their thinking.