Things every investor must know

  • Human Nature
    • Human nature has always been driven by fear & greed and it will continue to do so. How else can we explain the dotcom boom and it's subsequent bust? Or the market bottom of 2009.
  • Prediction is very difficult, especially if its about the future .
    • In my opinion, discounted cash flow is a futile exercise as it based on predictions and assumptions, which makes it highly susceptible to cognitive biases and subsequent errors.
    • One can look at the past performance of the company but no one has seen the future. As they say, past performance is not an indicator of future performance.
    • There is no denying that stock market is forward looking. The questions is - how much forward looking is it? Next quarter, next year? Certainly not next five years. For the long-term investor this is a good thing.
  • Bear and Bull market
    • There will be boom and there will be bust. Without a doubt, the stock market will go down and up. The unwise thing is to focus on the question of 'when' and 'how much'. The wise things is to focus on what will you do when it happens? (Hopefully, buy more of quality companies)
    • Every bear and bull market is different in its own way but humans for the love of classifications will continue to classify these with past bear and bull markets.
  • Quality
    • All companies are not created equal. There are good companies and there are so-so companies. Just like smart and hard working people with right attitude, good companies can take a blow or two and still survive and come out on top. Temporary distress or obstacles can provide excellent buying opportunities.
  • Buy and Hold
    • John Keynes said, "When the facts change, I change my mind. What do you do, sir?" We live in a constantly changing world. At some point of time, every industry and every company will face changing landscape. It is the ability to adapt to change (foreseen and unforeseen) that will keep companies from collapsing. In some sectors like technology, the pace of change is faster, hence the need to adapt faster. The point is that it is crucial to keep up with the company story.
  • Hot industry (Competition)
    • As Buffett and Peter Lynch often tout, competition kills profitability. High growth and hot industries attract a lot of competition which kills profitability. In the words of Peter Lynch, 'for every hot product in hot industry, there are 1000 MIT graduates figuring out how to make it cheaper in Taiwan'.

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