Thursday 27 September 2018

What Matters and What Doesn't

It is very easy for new stock investors to get started on the wrong track by focusing only on

  • the mechanics of trading or 
  • the overall direction of the market.


To get yourself in the proper mind-set, tune out the noise and focus on studying individual businesses and their ability to create future profits.

Begin to build the skills you will need to become a successful buyer of businesses.



1.  Investing does not equal trading

Investing is like a chess game, where thought, patience, and the ability to peer into the future are rewarded.

Making the right moves is much more important than moving quickly.



2.  Investing means owning businesses

If you are buying businesses, it makes sense to think like a business owner

This means

  • learning how to read financial statements, 
  • considering how companies actually make money, 
  • spotting trends, and 
  • figuring out which businesses have the best competitive positions.  
It also means coming up with appropriate prices to pay for the businesses you want to buy. 

Notice that none of this requires lightning-fast reflexes.

You should also buy stocks like you would any other large purchase:  with lots of research, care and the intention to hold as long as it makes sense.

Investing is an intellectual exercise, but one that can have a large payoff.



3.   You buy stocks, not the market

One thing to remember when listening to market premonitions is that stock investing is about buying individual stocks, not the market as a whole.

If you pick the right stocks, you can make money no matter what the broader market does.

Another reason to heavily discount what the prognosticators say is that correctly predicting market movements is nearly impossible.

  • No one has done it consistently and accurately.  
  • There are just too ma y moving parts, and too many unknowns.


By limiting the field to individual businesses of interest, you can focus on what you can actually own while dramatically cutting down on the unknowns.  

You can save a lot of energy by simply tuning out market predictions.

With so many predictions about the stock market floating around, simple statistics says there are bound to be a handful of them that come true.  When thinking about this, it is helpful to remember the saying: "A broken clock is correct twice a day."

Stocks are volatile.  Why is that?  Does the value of any given business really change up to 50% year-to-year?   "Mr. Market" tends to be a bit of an extremist in the short term, overreacting to both good and bad news.



4.  Competitive Positioning is most important

Future profits drive stock prices over the long term, so it makes sense to focus on how a business is going to generate those future earnings.

Competitive positioning or the ability of a business to keep competitors at bay, is the most important determinant factor of future profits.

Competitive positioning is

  • more important than the economic outlook,
  • more important than the near-term flows of news that jostles stock prices and 
  • even more important than management quality at a company.


Time is a precious resource in investing.

Business economics trump management skill.

A company with the best competitive positioning is going to create the most value for its shareholders.




Summary:


Active traders have three things working against them:  the bid/ask spread, commissions and taxes.

Stocks are not just pieces of paper to be traded; they are pieces of businesses.

The stock market as a whole is nearly impossible to predict, but predicting the outcome of individual businesses is a more manageable exercise.

Mr. Market is highly temperamental, over-reacting to both good and bad news.

Future profits drive stock prices over the long term, and the competitive positioning of a business is the most important factor in its ability to generate future earnings.

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