Jump to content

The most important lessons in my 8 years of value investing


muscleman
 Share

Recommended Posts

I put up my summaries here and hope it helps people on this board. I am no longer doing value investing but that's another topic. Please don't try to help and advise me to get back to value investing.  I know what I am doing and like what I am doing. :)

 

1. I keep statistics how the number of hours I put into each stock, and the improvement of my batting average. I advise any value investor to do this to find the optimal number of hours to put into each name. You have to balance between improving your batting average vs missing the opportunity to look at other names. For me, this number is unfortunately low at 30 minutes. My batting average doesn't increase after I put in more than that amount of time. The optimal for others could be hundreds of hours for Buffet and he could make his batting average as high as only occasional losers, but that's fine. Each person has different personality and work habits. I have a full time job and a family to accompany. I also don't enjoy sitting tight reading all day long. But anyone should keep this kind of stats to see how he is doing to improve batting average instead of merely his confirmation bias.

 

2. If I lose 50% on a stock, I have to make 100% just to break even. If I lose 10%, I just need to make 11% to break even. This is just simple math. In general, wider stop losses requires less experience and skills, and the wider the stop loss, the more likely your portfolio becomes like an insurance company. (Consistent small profits. Occasional huge losers.) But I would never ever operate with no loss cutting plan. Even Buffet has loss cutting plans. He sold his department store in Baltimore break even as soon as he realizes that it was not gonna be a winner for him, though he blew up on his Dexter shoe position. (Occasional huge losers)

 

3. Avoid mental power black holes. If I have 10 positions, and 9 of them are doing fine, but there is one position that I kept worrying about, probably because it is not doing well, etc. tanking 50%, it sucks in all of my mental power and got me worry about it all day long. For the next few weeks, I'd have no mood researching new stocks, or keep track of my existing stocks, and my performance will plummet. You can figure out ways to solve this problem that fits your personality. For me, I have to sell it to avoid thinking about it anymore, so it is better to sell early than late before losing too much money. I am sure Bruce Berkowitz got his mental power sucked into the black hole named "SHLD", and he stopped generating good ideas ever since. So is Eddie Lambert.

 

4. How to eliminate conflicts in my mind. From time to time, I really like a stock, but then I was worried about some other things, and didn't end up buying. A few months later, it is 2x. And also from time to time, I wanted to sell but didn't sell because of some other reasons, and a few months later it is 50% down. I was in constant distress of "I should have done this, and could have done that". If any of you have similar problems, I recommend reading Mark Douglas's book "Trading in the Zone", which focuses on psychology. It is really important to keep asking myself to forget about the artificial excuses I put up. What's really the conflict in the mind, and actively resolve any mental conflicts. Only after that will I be able to buy and sell like breathing naturally.

 

Link to comment
Share on other sites

I certainly won't be trying to convince you to get back into Value Investing in any of the ways most of us practice it. I get the impression that you are still considering the fundamentals, and not relying simply on Technical Analysis alone as a speculator, so to some extent you probably are some kind of investing trader who does consider valuation and qualitative factors important to investment and ownership mindset in selecting companies you'll trade.

 

It really seems you have identified what suits you psychologically, and to have learnt the hard way (as I suspect most of us have). I wish you well, and I'm interested in your experiences and development of your approach.

 

Things like when and why to sell or trade are probably the least developed aspects for most investors. There seems to be a number of method people try to employ to improve their results, including some that work most of the time but cause you to miss out on big gains occasionally. It's difficult to separate what feels right strategically from what actually yields the best result in the long run.

 

It reminds me of the offline Texas Hold'em poker app I have on my phone, playing mostly against computerised players without major exploitable flaws in offline mode. Frequently it's about folding early when the odds are against you and not trying to win it back the way you lost it by betting aggressively or trying to bluff on only modest hands. Then you have to be prepared to bet aggressively when the odds are strongly in your favour and hope that at least one opponent will call you.

 

You will quite often see that you would have had a winning hand after folding after another player has place a huge bet 20 times the blind/ante, representing more than half your chips before the dealer has even shown the flop, or when you needed, say a Jack on the final card and nothing else to make a straight and otherwise you have a weak hand, so you don't call your opponent's raise and one time in thirteen you miss out. I try to mentally reward myself for those misses because I know the odds were against me, but I might have to wait for 30 or 40 hands before I get an opportunity to win big or even recoup my gradual losses (e.g. with 4 opponents, I have a 4 in 5 chance of losing each hand, so I should expect a long streak of losses from time to time, which is fine if I'm only betting on those hands where my chances are much better than 1 in 5.

 

Aside from being a zero-sum game unlike investing, poker can certainly tell you important things about the psychology of trying to profit from probabilistic/random events given a certain amount of prior knowledge (i.e. the card you hold, the cards dealt face-up and how much your opponents raised or called at various times)

Link to comment
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
 Share

×
×
  • Create New...