Improving your judgements and building long-term wealth
4 August 2024
As long-time readers know, finding the right investment ideas is only one factor in successful investing. The whole concept of the ‘right investment opportunity’ is highly subjective.
Would a well-run business with strong margins and low debt qualify if it trades at 35x P/E, for example? Or would a company with several years of losses that has 50% of its balance sheet in cash selling at 0.5x P/B be a better alternative?
How one makes decisions in a world of uncertainty, interprets incremental news and decides whether the original investment thesis still holds are critical factors for long-term success.
With this in mind, I am a big fan of constantly learning and improving decision-making skills and the system I use to analyse stocks and manage the portfolio.
Reading is an essential part of this improvement process. So, every quarter or so, I summarise the most interesting materials that caught my attention that I think are worth reading.
This time, I focus on seven publications. Firstly, a study showing that professional investors are good at buying stocks but are really poor at selling. Their sell decisions underperform even relative to a random selling strategy. It reminds me how many weeks and even months we spend analysing a company before buying its stock and how, occasionally, we rush to sell it based on a weak quarterly report or some headline.
Another piece highlights the importance of following formal rules and parameters, which beats more subjective judgements. This is based on the study of medical judgements using mechanical and clinical assessments.
Hendrik Bessembinder has become famous for showing that wealth in the stock market is created by a tiny group of stocks. He has recently published a short summary of best-performing stocks over various periods. The most important conclusion is that the best-performing stocks in the short term are rarely the top performers over the long run. This is a good reminder that everyone should decide how they want to build wealth. One strategy is to hold ‘boring’ stocks with 10-15% total annual returns (dividend plus growth) over 40-50 years. Another strategy is to try to find the best performers but keep switching into new stocks as growth never stays permanently high.
Here is the list of recent publications that I found useful. You can find more interesting materials in the Library section.