I’m a huge fan of Tim Ferris (and Buffett obviously).
The answer: reproducible results.
He goes after the top experts in every field, questions them, interviews them, goes behind the scenes, and then tries to find out how they do what they do and in the exact fashion they do it so he can achieve the same results.
Doing so is an incredibly intimate process. To get results like the pros, you have to move like them, act like them, even think like them.
You have to model their thoughts. Their methods. Their principles.
And especially their principles. Why?
Life is too varied. Too complicated. Too confusing to remember – and follow – rigid rules. Principles on the other hand…
They guide us.
Shape our thoughts.
Guide our direction.
It can deliver us unto greatness or destroy us if they’re warped interpretations ala Hitler.
That’s why today, we focus on the 3 key principles all investors should know and most probably don’t.
#1 – Warren Buffet: “You shouldn’t own common stocks if a 50% decrease in their value within a short period of time causes you acute distress. And you can’t get rich swapping hundred dollar bills for eighty dollars.”
There is a deep lesson contained in the quote: All investors must learn to determine the true value of what they’re pouring their money into.
Let me give you an example.
Suppose Cortina or Hourglass suddenly decided to do a sale due to cash issues.
Everyone else in the watch industry is holding firm to their prices – they don’t have rent they can’t meet.
But not Cortina or Hourglass.
They’re in trouble, and they needed cash yesterday.
And they’re willing to chop off an arm to get that cash.
Patek Phillipe. Rolex. All the luxury brands they have are now selling at 50% off.
How many watches would you buy? When everything is on 50% off but you know the market value is different?
A fair number of you would say “as many as my bank account allows me to“. And that after that, you would turn right around and sell it on Carousell. Or just go to maxi-cash and get 75% back and profit immediately.
And you would be right in doing that.
Here’s the kicker.
How many more would you buy if Cortina or Hourglass decided that sales weren’t happening fast enough? And now they decide to sell watches at 90% off?
Many of you would tell me that, well, you would buy even more.
And you would be right to do that in a market where everyone else is holding firm to their values on their watches because you’d be making a hell of a lot of money selling those on the resale market!
When it comes to the stock markets, people act differently.
People buy a stock they think is undervalued. And when the stock becomes even more undervalued, when prices drop even lower, they don’t actually scoop more of it up! (presuming no changes in fundamentals of the company).
In fact, many of them might sell to get out of their position!
Why is there a disparity of actions?
One big difference stands out.
They are able to determine the value of a watch but not the value of a stock. That’s why they sold out.
When you know the true value of something, and when you’re able to determine its true value without bias and without emotions muddying the waters, it is far, far, far easier to watch the stocks you chose drop 50% in value.
After all, if I previously asked you for $1 in exchange for me to give you $2, and now I’m asking $0.50 to give you that same $2, there’s no real reason to be upset about it.
Warren Buffett definitely isn’t upset.
He’s in fact, pretty happy when that happens.
You should learn to be happy about it too.
But first, learn how to interpret the true value of a stock and see if it really is undervalued.
#2 – Don’t Make Emotional Decisions
I’ve appended below a series of screenshots with comments added for your benefits as to the dangers of making emotional decisions.
Total losses were aplenty.
I hope I don’t have to impress upon you the necessity of not allowing yourself to make emotional decisions.
It’s why we always emphasise using a framework to remove emotional decisions from our investment ideas.
#3 – Investing Like Young Warren Buffett vs Investing Like Old Warren Buffett
Many investors nowadays fixate on Buffett’s current investing methodology.
And rightly so, since he has gone on to trash the records of almost every investor professional or otherwise, whilst securing himself the seat of Supreme Investor Overlord Of All Time.
Jokes aside, what most don’t seem to realise is that Warren Buffett only invests the way he does now, because HE IS FORCED TO.
He has simply too much money to grow, to be able to use his prior methods.
Growing $100k by 20% is very different from trying to grow $100 million by 20%, which is very different again from trying to grow $1 billion by 20%.
Take a look at the words of Buffett himself.
“Cigar-butt investing was scalable only to a point. With large sums, it would never work well”.Warren Buffett
Basically, Warren was a victim of his own success. He got too successful to keep using the same methods.
It’s a happy problem to be sure. And we should always be mindful that it was his cigar butt approach that got him the “I have too much money to grow meaningfully” problem.
I sure would be happy to have that problem.
And I would not have an issue of buying wonderful businesses at fair prices when I too have too much money to grow meaningfully.
If you’re not yet a billionaire, be a younger Buffett and find cigars.
If you are a billionaire, be older Buffett and try to find wonderful businesses at fair prices.
The Guiding Framework
Investors should take note.
- Be able to derive the true/intrinsic value of a business. The fundamentals of a business should tell you how much you should be paying and how much you should NOT be paying. It will also tell you when the market has priced your stock far more unfairly than it should have, and thus created a greater opportunity for you to profit.
- Be unemotional. Investing is a numbers game. If emotions were allowed in it, we would call it marriage. Warren Buffett lost an estimated $55 million on Berkshire the textile company. Since most of us don’t have that kind of money to lose, I suggest you do not experience it first hand and regret it later.
- Warren Buffett only stopped investing the way he did because his sum of cash had grown far too large to invest. It was no longer scalable. That’s a good problem to have as an investor, and one I’d happily spend time finding an answer to the moment I have too much money to grow. I would suggest you use the CIGAR-BUTT METHOD until you achieve that “I have too much money to grow.” problem.
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See you there.
Behavioural Psychology fanatic. I like good food, movies, intelligent conversations and logical reasoning. I also dabble with options, factor-based investing, and data analytics.