The most powerful investing principles I've ever learned are counterintuitive.
That’s logical - if they were intuitive, I wouldn't need to learn them.
Here are 7 counterintuitive investing principles I had to learn the hard with (with visuals)
That’s logical - if they were intuitive, I wouldn't need to learn them.
Here are 7 counterintuitive investing principles I had to learn the hard with (with visuals)
1: Don’t haggle
My instinct is to pay the lowest price possible.
If a stock is trading at $21, I used to set a limit order for $20.50
Trying to squeeze out every last penny of value.
My instinct is to pay the lowest price possible.
If a stock is trading at $21, I used to set a limit order for $20.50
Trying to squeeze out every last penny of value.
But, my orders usually didn't fill.
Haggling caused me not to BUY a few mega-winners.
Which is FAR MORE costly than slightly overpaying.
Haggling caused me not to BUY a few mega-winners.
Which is FAR MORE costly than slightly overpaying.
Think of it this way:
If stock checks all your boxes and goes from $20 to $200
Does it matter if you got in at $19.56 or $21.25?
If you think a stock has 10x potential from today's price, don’t haggle over pennies.
Just buy it.
If stock checks all your boxes and goes from $20 to $200
Does it matter if you got in at $19.56 or $21.25?
If you think a stock has 10x potential from today's price, don’t haggle over pennies.
Just buy it.
2: Look for stocks that have ALREADY beaten the market.
If you study value investing (like I did), you might conclude that "cheap" businesses are best.
I used to scan the “all-time low” list for ideas.
If you study value investing (like I did), you might conclude that "cheap" businesses are best.
I used to scan the “all-time low” list for ideas.
I’ve since learned that:
1: Winners tend to keep on winning
2: Losers tend to keep on losing
It’s actually a WONDERFUL sign if a company has already beaten the market.
It means that:
1: The business model is working
2: Wall Street recognizes that it is working
1: Winners tend to keep on winning
2: Losers tend to keep on losing
It’s actually a WONDERFUL sign if a company has already beaten the market.
It means that:
1: The business model is working
2: Wall Street recognizes that it is working
Need "proof"? Look at Buffett!
$AAPL, $KO, $MCO, $AXP....
These were all mega-winners for years BEFORE he bought them.
Fighting anchoring bias isn't easy, but it's essential.
$AAPL, $KO, $MCO, $AXP....
These were all mega-winners for years BEFORE he bought them.
Fighting anchoring bias isn't easy, but it's essential.
3: Watch the business, not the stock
My instinct is to focus on the share price.
Pull up any stock’s data: What’s the first thing you see?
The stock price!
What does the media report on?
Stock prices!
Tons of focus on price, very little focus on business results
My instinct is to focus on the share price.
Pull up any stock’s data: What’s the first thing you see?
The stock price!
What does the media report on?
Stock prices!
Tons of focus on price, very little focus on business results
I’ve since learned that stock prices movements are random.
In the short term, they do not correlate to the business. In the long-term, they are 100% correlated to the business.
I now focus my time looking at the business, not the stock.
In the short term, they do not correlate to the business. In the long-term, they are 100% correlated to the business.
I now focus my time looking at the business, not the stock.
4: The P/E ratio IS NOT universally applicable.
When I first learned about the P/E ratio, it just made sense.
It became the yardstick by which I judged ALL companies.
When I first learned about the P/E ratio, it just made sense.
It became the yardstick by which I judged ALL companies.
In 2006, the company I was working for adopted @salesforce.
We were happy customers, so I checked out $CRM stock.
The P/E ratio was over 150, so I passed.
Here's what happened since...
We were happy customers, so I checked out $CRM stock.
The P/E ratio was over 150, so I passed.
Here's what happened since...
I’ve since learned that the P/E ratio IS NOT a universally applicable metric.
It's A metric -- not THE ONLY metric that matters.
You need to know:
1: When it’s useful (Phase 4 & 5)
2: When IT SHOULD BE IGNORED (Phase 1, 2, 3, & 6)
It's A metric -- not THE ONLY metric that matters.
You need to know:
1: When it’s useful (Phase 4 & 5)
2: When IT SHOULD BE IGNORED (Phase 1, 2, 3, & 6)
5: If you’re right 50% of the time, you’re system is WORKING.
My instinct was that 50% of stocks beat the market and 50% lose.
Therefore, an accuracy rate of 60% was needed to outperform.
My instinct was that 50% of stocks beat the market and 50% lose.
Therefore, an accuracy rate of 60% was needed to outperform.
A @jpmorgan study from 1980-2014 flipped my thinking.
It showed that:
✔️Only 36% of stocks beat the market
✔️Only 7% of stocks accounted for nearly ALL the index's gains
This means that the odds of picking a winner are not a coin flip - they are more like a dice roll.
It showed that:
✔️Only 36% of stocks beat the market
✔️Only 7% of stocks accounted for nearly ALL the index's gains
This means that the odds of picking a winner are not a coin flip - they are more like a dice roll.
6: Add at lower VALUATIONS, not just lower PRICES
My instinct is to double down on my losers.
If I liked a stock at $20, and the price is now $10, I should buy more, right?
Not necessarily…
Is the BUSINESS better or worse? That's what matters!
My instinct is to double down on my losers.
If I liked a stock at $20, and the price is now $10, I should buy more, right?
Not necessarily…
Is the BUSINESS better or worse? That's what matters!
I’ve since learned that I shouldn’t try and focus on buying at lower PRICES.
I should focus on buying at lower VALUATIONS.
I should focus on buying at lower VALUATIONS.
7: Low Valuation ≠ Undervalued
High Valuation ≠ Overvalued
@morganhousel wrote an eye-opening article in 2013
He looked at the Dow stocks in 1995 and asked: what P/E ratio did you need to pay to earn an 8% CAGR by 2012?
This table summarizes the results:
High Valuation ≠ Overvalued
@morganhousel wrote an eye-opening article in 2013
He looked at the Dow stocks in 1995 and asked: what P/E ratio did you need to pay to earn an 8% CAGR by 2012?
This table summarizes the results:
The findings:
✔️Many high-valuation stocks were UNDERVALUED
✔️Many low-valuation stocks were OVERVALUED
This article (plus experience) has taught me:
1: High-quality businesses deserve to trade at a premium
2: Low-quality businesses deserve to trade at a discount
✔️Many high-valuation stocks were UNDERVALUED
✔️Many low-valuation stocks were OVERVALUED
This article (plus experience) has taught me:
1: High-quality businesses deserve to trade at a premium
2: Low-quality businesses deserve to trade at a discount
Most of these lessons relate to valuation, which is the trickiest subject in investing!
In 1 week, I'm hosting a FREE webinar that discusses valuation in detail:
Topics:
- History of Valuation
- 4 Valuation Methods
Register here (it's free): lu.ma
In 1 week, I'm hosting a FREE webinar that discusses valuation in detail:
Topics:
- History of Valuation
- 4 Valuation Methods
Register here (it's free): lu.ma
To summarize:
1: Don’t haggle
2: Find stocks that are already up big
3: Watch the business, not the stock
4: P/E isn't universally applicable
5: The odds aren't a coin flip
6: Add at better value points, not just better prices
7: Low Valuation ≠ Undervalued
1: Don’t haggle
2: Find stocks that are already up big
3: Watch the business, not the stock
4: P/E isn't universally applicable
5: The odds aren't a coin flip
6: Add at better value points, not just better prices
7: Low Valuation ≠ Undervalued
These threads take me a few hours to create.
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If you enjoyed it, follow me @BrianFeroldi.
I demystify the stock market with daily tweets and a few threads like this each week.
Want to share it with your audience?
♻️ Retweet the first tweet below:
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