I came to another conclusion - the market is pretty clever. Value investors like to say if you think of the stock as a business, have a longer-term outlook and think logically, you'll beat the market. Not true. The market sees through bullshit earnings, the market thinks longer-term than most ordinary people and most of the time, the market's correct.
In the long term, I share that belief. Nonetheless, in the short term, the abundance of instances where the market assesses through optimistically biased lenses directed towards the distant future is enough to cast doubt on its ability to consistently be fair and rational. Simply reflecting on the period from 2020 to the present reveals numerous stocks priced as if extraordinary growth over 20 years had already materialized.
However, can viewing a stock as a business, maintaining a long-term perspective, and employing logical thinking guarantee outperforming the market? While I don't believe there's a guarantee of surpassing the market, adopting this approach significantly reduces the likelihood of encountering unpleasant surprises and unwarranted risks for the investor, which is, in my view, a success in its own right.
Why do you invest
My perspective on this has evolved significantly over the past few years. I would say the common thread is the desire to achieve financial independence. On this note, I can confirm that, when young, working and being able to save a substantial percentage of our income is what rapidly grows our net worth, not necessarily investing. At least for the majority of young people, unless they are stock market geniuses and/or utilize leverage.
Today, investing, for me, is exchanging my dollars for an equivalent (or more if undervalued) value in productive economic assets. This perspective is closely linked to my approach to thinking about a business and, therefore, analyzing it: focusing on net operating assets and the return on net operating assets. For instance, if I find a good company, well-managed, with a solid balance sheet, capable of generating a 15% average return on net operational assets per year, and I can buy these net operational assets at 90 cents on the dollar, I'll make the purchase. Will I beat the market this way? I don't know... I'll find out in 10 or 15 years. But it's the method that resonates with me and allows me to sleep like a baby. By proceeding this way, I have the luxury of detaching myself psychologically from the market and evaluating my positions based on the economic performance of the company. This way of thinking also helps with game selection: I don't have to make money on everything or like everyone else. That’s pretty useful when there’s an inflow of new people playing the market or a new industry attracting too much capital.
On another note, have you listened to the Richer, Wiser, Happier episodes on YouTube? They sometimes delve into philosophical topics, I believe you might enjoy. Richer, Wiser, Happier
Good investing,
Will |
