Friday, February 13, 2015

More Action Doesn't Neccesarily Lead to Better Results in the Field of Investing

In general, as we grow up, we are given a standard set of pieces of advice. One the most hackneyed piece is about working hard to achieve success, mostly in reference about monetary rewards,

Broadly speaking, I agree 100% that hard work is important in any field, if one is serious about achieving extraordinary success. And, the term of hard work ussually means spending mroe hours practicing a routine, and taking massive amount of action (in general).

However, the field of investing demands a different set of rules for success. More action  doesn't necessarily lead to better results. On the contrary, it might lead to disastrous results.

This might seem a contradictory statement, but, let's deep a little deeper to test the validity of my statement. First, let's define the true menaing of the term "investing". Investing is laying capital now, so that to receive more capital later. The ley items here are, when and how much capital are getting back. These are important considerations. However, they are out of scope of this article. Let's return to the question of obtaining more capital that was invested.

To achieve a commensurate return on invested capital, one has to take some action. The action is to find an object of investing, in our case a suitable company with a growth potential (profitability) at an attractive price point (not expensive valuation). Once the object is identified and passed a quality control, one has only do second step, which is taking a share in this company and expect the market to value the chosen company higher. This happens, because the company we chose will grow its profitability. So, it seems pretty straightforward. So the only thing to do next is kick back and relax.

But, does this show the real life experience of real maket participants. Absolutely no!

Most of the market particiapants, see the market action to invigorate them with ideas which lead to overtrading, This is the premise, that makes people forget that stocks are not just tickers on the screen, they represent shares of companies. It is really difficult to find a suitable company to invest, let alone do it on a daily basis. For me, it is important not to lose focus on many companies, if I found one or a few companies, then it important to buy as much stakes as possible in these nuggets and let the markets work its majic. This way requires anti-action from the participants, and seems to too easy. However, it is really not easy to just sit and do nothing, while all around seem to be taking more action day by day. But, this is the most correct way to invest, at least in my opinion.

The steps described above might seem to be too simplistic, and they mostly are. These steps were of illustrations only. If anyone has any quesitions, please do send me your questions. I will be happy to elaborate more about each of the steps described above.

Why Companues Go Public: Rationality Comes First

This is a post that was written as a response to the post on FB. Here is the link: