Attempting to be Better than Average

I've spent a lot of time reading about investing and experimenting with investing and the reason is, simply, I enjoy it. That said I think my track record has been average and I'd like to be better than average if possible. According to Ben Graham and Warren Buffett and Nick Maggiulli, the average person should just keep buying the market index and over time it'll work out. Good companies stay in, bad companies fall out, over time the economy grows and shares in that economy advance. 

A lot of my net worth, almost 60% in fact, is in the indices. So I'm following that advice. 

25% of my net worth is in illiquid, private investments, such as farm land, a storage facility, and commercial real estate. These investments have been outstanding and I'd happily do more if opportunities arose. 

Most of my attention, however, is directed at the 8-10% I have in public markets and stock picking. This part of my net worth is under my control day to day and I'd like it to be better than average.

Why was I average?

Well early on in this blog I think I had a lot of time (pandemic) and was building a decent portfolio, but then of course the market got crazy and I got pulled into digital transformation and high flying futuristic stocks. At least I didn't chase bitcoin! 

There were hits and misses and overall I can't complain. However I still would not say I performed better than average. I did however perform better than I have in the past, by avoiding certain mistakes.  For example I had a few big winners and I was smart enough to take some profits before they turned into big losers. Then again I was able to learn all new types of mistakes. Progress!

The new mistakes? Justifying poor valuations. Investing in stories. Rotating into sectors that were loved and watching them become unloved. Technical analysis. And probably most of all, doing more watching than analyzing, impatiently buying based on price movements and boredom. I love watching fin TV but fin TV is all about the short term -- what just happened and what is happening today. Market commentators, especially those running other people's money, need to keep rotating in and out of sectors to stay relevant. An investment firm will lose clients if their stock picks underperform the market for a few years, and they are not incentivized to patiently sit and do nothing. But sitting and doing nothing might be a better way to invest most of the time. 

How to improve?

Well it remains to be seen if I can be a great investor but I've been reading Graham and all Buffett's letters and a few principles are standing out.  Here they are in my mind, in no particular order.

1. Stocks are shares of businesses. It's so easy to trade these days that it's easy to think of stocks as transient ephemeral lottery tickets that can be exchanged at any time for new tickets. But the intelligent investor a la Graham Buffett Zweig et al doesn't think of stocks in this way. Buffett considers every stock purchase a carefully considered investment in a business, just as if you were investing in a local business. As such he looks at the numbers and the future prospects and the management as if his investment will be tied up for many years. 

2. Great businesses perform well over time; patience is a virtue.  Buffett also understands that businesses should be judged over time, as in multiple years rather than months or quarters. The Oracle is willing to wait for the valuation of the business to reflect this reality; he's not in a hurry. The market is in a hurry, with constant price updates and new issues and breaking news. But a great investor doesn't care about that. He waits for a good price, and once he gets that price he is content to let the business execute and grow its value.

3.  Focus on a few great ideas. He also doesn't really care about jumping in and out of ideas. Buffett is content with a few great ideas and making big bets on those ideas that are the most rewarding. This is a matter of focus and careful selection, and works hand in hand with patience. Buffett won't abandon Coca Cola because one quarter Pepsi sold a little more. He bought Coke at a great price and is content to let it compound over many years.  

He also doesn't diversify. His philosophy is that the more he diversifies, the more he will achieve average market returns. Well in that case, buy an index fund. To be great, he wants focused investments that are at a higher standard.

4. Valuation matters.  A great business is not a great investment, however, if one overpays. Here's where Buffett's adherence to math matters. There are a lot of great businesses out there but you must always think of it like a private transaction, buying a share of a business. If you invest $1 Million in the local grocery store, but your share of the store's profit is only $100 per year, you overpaid. You are not getting a return that justifies your investment. Many companies are very complicated, but good value really isn't much more complicated than that. 

At the same time, Buffett admits that it's better to buy a great business at a fair price than a fair business at a great price. 

So, have a business owner's mindset, be patient, focus on a few great ideas, and buy at the right price. There's much more that could be said but this is my starting point.

I don't have the math proclivity that Buffett has but I think I can learn these simple principles and start putting them into action. Over the next several months, my goal is to shift my portfolio from the current mish mash it is toward a focused, patient set of investments that will compound over time. 









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