3 Hour Investor Newsletter incorporating the “Newsletter Portfolio” Week 29- 2016-Dec-27 Who is this newsletter for? You want to manage your own portfolio. You can afford 3 hours per week You can handle the emotional side of investing This newsletter is not for you if You can’t control your emotions You don’t have 3 hours per week to manage your Money. You’re a buy and hold forever investor.
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You can handle the emotional side of investing This ... · 12/29/2016 · I’m sure you’ve all read your fair share of Buffett quotes. It’s fairly easy to find Buffett quotes
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3 Hour Investor Newsletter incorporating the “Newsletter Portfolio” Week 29- 2016-Dec-27 Comment. We now have 8 stock holdings
Losers >10% -
Losers 5.1%-10% 1
Losers 0%-5% 2
Gainers 0%-5% 1
Gainers 5.1%-10% -
Gainers10.1% - 20% 1
Gainers 20%-30% 2
Gainers 30%-40% -
Gainers >40% 1
3 Hour Investor Newsletter incorporating the “Newsletter Portfolio” Week 29- 2016-Dec-27 This week’s newsletter is a little different. This week we’ll cover off some of the things I’ve learned
whilst “managing” this portfolio.
On the topic of Buffett (or I suppose being purely fundamental in
approaching portfolio management)
I’m sure you’ve all read your fair share of Buffett quotes. It’s fairly easy to find Buffett
quotes online…so here are a few.
“We select such investments on a long-term basis, weighing the same factors as would be
involved in the purchase of 100% of an operating business:
(1) favorable long-term economic characteristics;
(2) competent and honest management;
(3) purchase price attractive when measured against the yardstick of value to a
private owner; and
(4) an industry with which we are familiar and whose long-term business
characteristics we feel competent to judge.”
“Only buy something that you’d be perfectly happy to hold if the market shut down for 10
years.”
“If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten
minutes”
“When we own portions of outstanding businesses with outstanding managements, our
favorite holding period is forever.”
“Over the long term, the stock market news will be good. In the 20th century, the United
States endured two world wars and other traumatic and expensive military conflicts; the
Depression; a dozen or so recessions and financial panics; oil shocks; a fly epidemic; and the
resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.”
Ok I will acknowledge that if you understood everything that Buffett does and did all the things
that he’s done then startlingly effective investment returns would result. And yet how many
people have managed to be Buffett. Exactly not many. Perhaps because of other quotes about
him.
Firstly he’s reported to read 500 pages per day and is constantly researching. This habit isn’t one
off…he’s been doing it for many decades
He has at least one partner in crime and I wonder how many researchers support him. He can
discuss ideas intelligently and with full trust and examine ideas from many different perspectives
Access to information: When Buffett wants to ask a question it’s highly likely that just about
anyone he wants to speak with will take his call, respond to an email and or write a detailed
response and provide access to required information. The resulting information can be
reviewed and cross checked from multiple perspectives.
As he walked through the exhibition that day, Galton came across a weight-judging
competition. A fat ox had been selected and placed on display, and members of a gathering
crowd were lining up to place wagers on the weight of the ox. (Or rather, they were placing
wagers on what the weight of the ox would be after it had been “slaughtered and dressed.”)
For sixpence, you could buy a stamped and numbered ticket, where you filled in your
name, your address, and your estimate. The best guesses would receive prizes.
Eight hundred people tried their luck. They were a diverse lot. Many of them were butchers
and farmers, who were presumably expert at judging the weight of livestock, but there
were also quite a few people who had, as it were, no insider knowledge of cattle. “Many
non-experts competed,” Galton wrote later in the scientific journal Nature, “like those clerks
and others who have no expert knowledge of horses, but who bet on races, guided by
newspapers, friends, and their own fancies.” The analogy to a democracy, in which people
of radically different abilities and interests each get one vote, had suggested itself to Galton
immediately. “The average competitor was probably as well fitted for making a just
estimate of the dressed weight of the ox, as an average voter is of judging the merits of
most political issues on which he votes,” he wrote.
Galton was interested in figuring out what the “average voter” was capable of because he
wanted to prove that the average voter was capable of very little. So he turned the
competition into an im-promptu experiment. When the contest was over and the prizes had
been awarded, Galton borrowed the tickets from the organizers and ran a series of
statistical tests on them. Galton arranged the guesses (which totaled 787 in all, after he had
to discard thirteen because they were illegible) in order from highest to lowest and graphed
them to see if they would form a bell curve. Then, among other things, he added all the
contestants’ estimates, and calculated the mean of the group’s guesses. That number
represented, you could say, the collective wisdom of the Plymouth crowd. If the crowd were
a single person, that was how much it would have guessed the ox weighed.
Galton undoubtedly thought that the average guess of the group would be way off the
mark. After all, mix a few very smart people with some mediocre people and a lot of dumb
people, and it seems likely you’d end up with a dumb answer. But Galton was wrong. The
crowd had guessed that the ox, after it had been slaughtered and dressed, would weigh
1,197 pounds. After it had been slaughtered and dressed, the ox weighed 1,198 pounds. In
other words, the crowd’s judgment was essentially perfect. Perhaps breeding did not mean
so much after all. Galton wrote later: “The result seems more creditable to the
trustworthiness of a democratic judgment than might have been expected.” That was, to
say the least, an understatement.”
Ummmm why is he quoting some weird book, what’s this got to do with portfolio management?
The stock market seems to me to be setting prices based on the individual decision making of
hundreds of thousands (or perhaps even millions) of investors. Some of these investors will view a
stock bullishly. Some will view a stock bearishly. The bulls will believe that a stock is under priced,
or fairly priced or even over priced…. and perhaps is likely to go up in future or at least stay the same
but pay an acceptable return. The Bears believe that a stock perhaps is over priced or is trending
down or that they can do better elsewhere. (maybe others just need some cash to pay their tax
debts for example)
3 Hour Investor Newsletter incorporating the “Newsletter Portfolio” Week 29- 2016-Dec-27 Everyone can see the current price. Everyone can see historical prices. Everyone has access to some
pieces of information and use that information to make a judgement about whether the prices are
going up or going down in future.
The market is where all these people come together and set a price. If there are more buyers than
sellers…then the price trends up. If there are more sellers than buyers then the price trends down.
If everyone agrees on the price…then volumes dwindle and prices remain flat.
If there are way more buyers than sellers…then prices can increase possibly even rapidly. If there
are way more sellers than buyers…then prices can decrease…usually much more steeply than they
can increase.
Do markets sometimes get prices wrong? It seems so. Almost every day there are surprising surges
in prices and surprising drops in prices. Sometimes this happens when “seemingly” new information
is released to the market. Sometimes it happens for no apparent reason. Sometimes there are
more and more optimists appearing every day, driving prices higher and higher. This time it’s
different. Growth can continue forever. Everyone seems to be making money. If I don’t join in now
then I’ll miss out. There’s little chance I’ll be losing out. Good news means higher prices. Bad news
is ignored.
So prices drive higher and higher and higher until something changes somewhere, somehow, some
time…then all of a sudden the mood changes and everyone becomes a pessimist. Suddenly it seems
I have to get out now, but where have all the buyers gone. Prices drop sharply. People stop
spending. Bad news means lower prices. Good news is distrusted and down the prices go even
further. The world as we know it is going to end. Let’s put money into gold as inflation is going to
make us poor. And then one day prices seem cheap…perhaps it’s time to buy again.
Conclusion.
So can we trust the markets to properly value a stock. Well I’d say that the markets are made of
millions of decisions made rationally and emotionally and most of the time will reflect the push/pull
between those who are bears and those who are bulls. Yes they will be manipulated by those who
can control what sort of information is released and the timing of that. Yes they’ll sometimes be
emotional rather than rational. And yet the information is probably the best we can get. And we
should pay attention to it. As close as reasonably possible.
On the topic of decision making.
Key questions.
How can I make good decisions (knowing that I’m a human driven by faulty thinking and
ANZ Has been rising solidly since about mid year 2016. Several other banks have also got similar patterns. Have you noticed this trend. R U onboard?
Parting comment
It’s generally tricky to observe the markets based on market prices at this time as so many buyers
and sellers are on holidays so volumes are low. If the wisdom of crowds do get prices right then the
size of the crowd has dropped dramatically
I wish you all happy holidays and happy new year. May 2017 be your best investing year ever. May
you learn more in 2017 than any year previously.
Warning. This newsletter is provided for your entertainment only, I’m not a financial adviser, I have not taken account of your objectives, financial situation or needs. You should therefore consider the appropriateness of any descriptions of my Newsletter and its newsletter portfolio in light of your objectives, financial situation and needs, before taking any actions.
All views and information expressed in this newsletter are not the views of Lincoln and or its directors, agents, representatives and employees.
I do invest and trade in shares, I’ll mark the ones that I own with (**)