The Investing Motherlode is structured in eight Parts which progressively explain not only how to invest but why it works.
The Table of Contents to the right is expandable. Click on the down arrow and you will see the title of each Part. Click on the title of any Part for an introduction to that Part. Click on the down arrow beside the title to any Part to expand the table to show the Chapters in that Part. You can also expand the Chapters to see a list of the Sections in each Chapter. Click on any title of a Part, Chapter or Section to go to it.
A word about terminology. You can hover (for a brief explanation) or click (for full text) words and phrases highlighted in blue, such as Broad framing. These words and phrases have a special meaning. These special meanings or definitions are discussed in more detail in the text when we first deal with them in the main body of the Motherlode.
As well, the glossary, Appendix 1: A glossary of special terms and phrases, is always available.
Sometimes words will be found in ‘italics in quotations’ from various sources. These words in italics are usually not defined terms in the Motherlode. The italics in the quotes are retained to keep the original author’s meaning.
Some expressions like Loss Aversion or the Endowment Effect, may not be highlighted in blue. They do start with capital letters. They are terms used by authors I have referenced. Such expressions may have special meanings attributed to them by the authors. This is highlighted by starting them with capital letters. Rather than trying to define them I have elected to go with the meanings expressed by the authors quoted. My expectation is that the full quote and surrounding text will make the expressions understandable enough in that context.
There are times when these expressions can be defined. In those cases, they still have caps, but they are also highlighted in blue.
Any words or expressions not highlighted in blue, such as Loss Aversion, can be looked up using global search in Investing Motherlode. See the search feature on the right of every page. The search will take you to the entry or entries where the word or expression is used. Unfortunately, the search feature does not highlight the word or expression there or take you to the exact text.
The approach in the Motherlode is to take nothing for granted. I will not tell the investor to do something because Warren Buffett does it. There must be a reason why. We learn from the great investors but we must always know why. I have read many investment books over the years and have picked up ideas from many of them. In this writing, I liberally quote from many books, articles and other sources. These range from investing legends such as Bernard Baruch, Warren Buffett and John Templeton to Nobel Prize winning academics. They have articulated ideas better than I could and their words carry far more weight than mine ever could. I also wish to give credit where credit is due, although I imagine every great investor quoted in the Motherlode would, in turn, give credit to others for the shoulders they have stood on.
I make absolutely no excuse for the prolific use of quotes in the Motherlode. I make no pretense that this is an academic work in which I use my own words to articulate every idea expressed with proper reference credits given. My object is to explain things as clearly as possible and with as much credibility as possible no matter whose words are used.
If you read every word in the Motherlode and any number of other sources on investing you cannot hope to immediately be a successful investor. It takes many years of practice with real money to develop the expertise. It is best to start small and start early.
A couple of basic concepts
Now is a good time to introduce the concept of intrinsic value. The idea that a security may have a value different from the price determined in the stock market is central to the investment philosophy espoused in the Motherlode. In the Motherlode I use the terms intrinsic value and fair value interchangeably.
In investing, reference is often made to the idea of value. In the Motherlode the word value always denotes intrinsic value. There is an absolutely crucial distinction between price and value. Investors should keep in mind Warren Buffett’s words in the 2008 Berkshire Hathaway annual report: “Price is what you pay. Value is what you get.”
This definition of intrinsic value has merely scratched the surface. Since value is so crucial to our investing journey there is a complete chapter in the Motherlode devoted to the subject titled 38. The Problem of Determining Intrinsic Value.
A hated expression
Many in the investment industry use the expression ‘market value’ when talking about stocks. This is both confusing and wrong. In a similar vein, people use the term ‘overvalued’ when they really mean ‘overpriced’. To avoid confusion, I always use the term ‘overpriced’ rather than ‘overvalued’.
In fact, there are three words all investors should ban from the investment lexicon. They are: market value, overvalued and undervalued. Overvalued and undervalued are simply meaningless words when thinking about the stock market. The stock market does not value anything.
Many assets like diamonds, paintings and real estate are worth what people will pay for them. For these kinds of assets it is sensible to use the term ‘market value’. To make an assessment of the value of a house one must look at the price that comparable properties sell for. This is not the case with stocks. The stock market prices stocks.
There’s a lot about investing psychology in the Motherlode; best to learn a few terms before we go too far.
The term behavioral edge is the edge an investor can gain in the stock market by adopting a combination of good principles of operation explained in full in the Motherlode and the rules set out in the Motherlode to overcome behavioral biases and cognitive errors. I call these gap-to-edge rules – beat the behavioral gap and take advantage of the behavioral edge.
Beating the market
If the investor so armed works hard at investing they should be able to beat the market. In practice, the good principles of operation set out in Part 4 and the rules to mitigate our behavioral biases and errors merge seamlessly to become one’s investment philosophy. That is, in time, the investor will develop his own style without saying such and such a policy is one of the good principles of operation or one of the gap-to-edge rules that is being followed. It is a comprehensive philosophy that is alive to the problems of market psychology. It is based on common sense, is robust and is KISS compliant.
In a nutshell
If you want to immediately see in point-form the essential investing principles of the Motherlode, they are listed in point form in Chapter 27. Sound Principles of Operation