Disciplined but flexible
One’s investment philosophy must be robust and dependable. It should perform well even in face of uncertainty. It must carry the investor through thick and thin.
If the investment philosophy has been well conceived, the investor will have confidence to stick with it during the bad times. Paper losses on an all equity portfolio might, once or twice or perhaps even more, in an investing lifetime, exceed 50 percent at some point of extreme general financial crisis or deep recession. That is not the point to be abandoning the philosophy. It is the time to see the bad times through and take advantage of opportunities.
That said, how sacrosanct should your core investment principles be? Let’s think about it.
Core investment principles
Here are what I would call my core investment principles. They come from Ben Graham, Maynard Keynes, Philip Fisher, Warren Buffett, John Templeton and a few others:
A balanced portfolio
But, none of these core principles is sacred and inviolable. If we declare unwavering adherence to the long view we may lose the flexibility to sell a stock when we realize it is not nearly as superb as we thought when we bought it. There must be a limit to one’s patience.
As for buying only superb companies, they are frequently overpriced. That is because everybody knows they are superb. Sometimes the best time to buy a stock is when the company doesn’t look so superb. It may be going through some turbulence. Nevertheless, it is a good rule before buying shares in any company to ask oneself whether this is a truly superb company. In some limited cases we are content to own a company that is becoming a superb company. This is a trickier proposition.
Buying only at a very attractive price is simple to say. One has to have a good idea of what the fair value of the stock is. This leaves room for some fudging. The very attractive price is part and parcel of buying with a margin of safety.
The margin of safety is a principle that Ben Graham and Warren Buffett both treat as a cornerstone of investing success. Buffett has had to modify that policy as Berkshire Hathaway has grown larger. It’s difficult to have a hard and fast rule about margin of safety. For example we might say that we will only treat a stock as a bargain when it is trading at a 30% discount to intrinsic value. There may be times when we bend that rule to ensure we can build a position in the company.
Sometimes the investment climate calls for a somewhat unbalanced portfolio.
The diversification of a portfolio can be somewhat like a concertina. At times it is more concentrated and at other times less so.
So, my core principles are not completely inviolable. Having said that, these principles are as close as we can come to the six commandments. Knowing when to bend the commandments is what we learn from experience.
This leads to a broader principle: an open mind
We may preach a disciplined approach to investing. After all, consistency in approach is valuable. But, it can be carried to a fault if it becomes too formulistic. With rigid consistency you become a slave to your preconceived ideas.
“A foolish consistency is the hobgoblin of little minds” are the oft quoted words from Self-Reliance, the essay by the American philosopher and essayist, Ralph Waldo Emerson. The essay is Emerson’s plea for people to open their minds to new ideas, avoid preconceptions and false consistency.
John Templeton advised flexibility; his Maxim 19. “Never adopt permanently any type of asset, or any selection method. Try to stay flexible, open-minded, and skeptical. Long-term top results are achieved only by changing from popular to unpopular the types of securities you favor and your methods of selection.”
How do we learn this?
Philip Fisher, whose writings had considerable influence on Warren Buffett, wrote in his later years, summing up the development of his investment philosophy,
“No investment philosophy, unless it is just a carbon copy of someone else’s approach, develops in its complete form in any one day or year. In my own case, it grew over a considerable period of time, partly as a result of what perhaps may be called logical reasoning, and partly from observing the successes and failure of others, but much of it through the more painful method of learning from my own mistakes.” (Fisher, Common Stocks and Uncommon Profits and Other Writings, 1958,1996) p228.
Nothing is easy when it comes to investing. But, that is the fun of it. We study the greats and learn what we can from books. We make mistakes and try to learn from our mistakes. In the end, nothing can be reduced to a formula. Ultimately we develop our own style that carries us through what Gerald Loeb called ‘The battle for investment survival’.
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