This post is written by Larissa Fernand, editor of Morningstar.in and initially appeared in Moneycontrol.com
Amazon’s CEO Jeff Bezos finds himself in the news for a variety of reasons, and rightly so. There are numerous posts on the lessons budding entrepreneurs can learn from him. Matter of fact, there are lessons investors can learn too. But I would like to talk about just one insight that he shared in an interview with Wired a couple of years ago. He remarked that he likes to maintain a firm grasp of the obvious at all times. For Amazon, that translated into a focus on selection, speed of delivery and lower prices.
Bezos went on to explain that there are two ways to build a successful company. One is to work extremely hard to convince customers to pay high margins. The other is to work extremely hard to be able to offer low margins. Both work. Neither is superior to the other. It’s just that he preferred pitching his tent in the second camp. His aim for Amazon has always been to have a very large customer base with low margins, rather than a small customer base and higher margins.
If you want to be a successful investor, you should approach investing with such clarity and focus.
You need to narrow down on an investing philosophy that works for you. Long-term. Short-term. Contrarian. Value. Growth. Bill Ackman considers himself an activist investor. Seth Klarman believes in a long-term orientation and patience. Howard Marks buys assets that are out of favour and his style is embodied by the motto “if we avoid losers, the winners will take care of themselves”. Marc Andreessen bets on change, and says that Warren Buffett bets on things that won’t change. Philip Fisher believed in holding a concentrated portfolio of outstanding companies over the long term. (Outstanding meant superbly managed companies with compelling growth prospects that he understood well).
Even under the umbrella of one strategy, there are numerous iterations. Investors can look at the same company, in the same market, at the same time, and have two completely different opinions on whether the business will work and if the stock is a good buy at that price or not.
There is no one rational price to a stock. In The Reasonable Formation of Unreasonable Things, the writer throws an interesting question to the reader: How much should you have paid for Yahoo! stock in 1999?
(Why Yahoo!? Here’s a quick background. It was an iconic brand that ruled the internet in its early days and was the most popular starting point for web users. On April 12, 1996, Yahoo! traded publicly for the first time. At the end of its first day of trading, its stock closed at a (split-adjusted) price of $1.38. On January 3, 2000, it closed at an all-time high of $118.75. In less than 4 years, Yahoo!’s stock price increased by 8,505%.)
Back to the question: How much should you have paid for Yahoo! stock in 1999?
The answer depends on your investing philosophy.
30-year time horizon: the smart price to pay was an analysis of Yahoo!’s discounted cash flows over the subsequent 30-years.
10-year time horizon: some analysis about the industry’s potential over the next decade and whether management could execute on its vision.
1-year time horizon: an analysis of current product sales cycles and whether we’ll have a bear market.
Day trader: the smart price to pay is “who the hell cares?,” because you’re just trying to squeeze a few basis points out of whatever happens between now and lunchtime, which can be accomplished at any price. A day trader could accomplish what he needed whether the stock was at $5 a share or $500 a share, as long as it moved in the right direction.
The key to investing success is NOT to compare your philosophy with anyone else.
Edward Smith, now CIO at legalsuper, shared his views on building a winning investing strategy in Money Management when he was at Australian Unity Investments. He used the analogy of cyclists to drive home his point.
The sprinters have perfect timing and immense power to accelerate over a short distance. However, the sprinter’s attribute of pure power entailing plenty of fast-twitch muscle, becomes a liability in the mountains.
The key factor for mountain climbers is the power-to-weight ratio - they invariably have a bird-like frame, are mentally very tough and have immense stamina. Unfortunately, mountain climbers can’t sprint with the best.
Time trial specialists have plenty of power coupled with a highly efficient cardiovascular system, allowing them to maintain high power output for long periods of time. But they must grit their teeth to hang on in the mountains.
In a nutshell, Smith said, no one cyclist is good at all geographical conditions.
Even in investing, bear in mind that you are not running anyone else’s race.
1) To be a successful investor, you must have a philosophy and a process you believe in and can stick to even when the times get tough. This will keep you grounded. It will allow you to invest in a way that is consistent with your personality and needs and goals.
2) Be reasonable with your expectations. Aiming too high will result in disappointment or excessive risk, or both. As Peter Bernstein says, the market is not an accommodating machine; it won’t provide high returns just because you need them.
3) No single approach will allow you to profit from all kinds of opportunities or in all in environments. And that is okay. You don’t have to invest in everything. You don’t have to catch every trend.
4) No one performs great all the time. Don't get discouraged. Be patient.
And most importantly, specially in the current market, never confuse brains with a bull market.
This post initially appeared in Moneycontrol.com
