My 4 core concepts of Investing

Welcome!

Hey guys thank you for visiting my blog 

I would start this blog by introduce myself first. 

My name is Vincent and I’m a chef who started to invest 3 years ago.  At first I was just thinking of finding a passive income(later found out that it couldn’t’ be more active). After that I started to find the best investors to learn from. The first come to mind is of course none other than Warren Buffett. Upon learning more his teaching naturally I also learnt something about Charlie Munger, thus it lead me to his “Poor Charlie's Almanack”. That is the book that changed my life. I’ve became his pupil and practice everything that he preached. Most notably is of course to have a moral obligation to be rational and making sure that I learn something everyday. Luckily with internet and books I easily acquired knowledge that I need to have so that to become a better business analyst. I’m a very curious guy, books about history, business, biographies, and psychology interest me a lot. it helps when I gotta learn concepts from multiple disciplines to build up some useful mental models. 

The reason I create this blog is because I would like to know more people in investing, to attract like minded investor and expand my network in investment field, or if possible, able to be lucky enough to help out and giving some advice to prospective value investor. I know a lot of you guys probably already very familiar with Warren Buffett and its teaching so rather much of the things I’m writing will instead focus on Munger’s wisdom and its investing approach more along with experience and result I have after adopted his methods for past 3 years.

I’ve been posting in investingnote for more than a year already and you can find my transaction records, previous posts and performance(I beat the market;)) there. 

https://www.investingnote.com/users/vincentwong10#/

I wouldn’t think I have a good writing skill(I’m just a chef for my whole career) So please excuse me if I could not deliver the massage well. Hopefully I will be a better through practice.  

I’d write some idea that interest me recently and also share some business that got my attention. Every 3 months I’d conclude the quarter by disclose my holdings of my portfolios and performance for that period. 

One of the most important things when you become an investor is to know who you are, you need to form your own principles and thinking models so that it is easier to systematically reduce emotional mistake and hopefully be more rational when making business decisions. If you haven’t developed philosophies of your own I highly recommend you to so. I will first me explain my 4 fundamental Investing concepts(will talk about mental models on other day), they are the cores of my approach to investing, some of which you probably already know but it is better to express them to you in my own words:

Shares as a Fractional Ownership in the Company

Stock is essentially a small portion of a business. You have the partial ownership of the business once you buy a single stock in that company. As simple as it sound many people find it hard to comprehend. Even for some who understand it they would say those are too small of a portion they own to make any difference. However, I think the way you view your ownership of your business greatly influence your investing decision. If you view it as a bullet that go up and down in a chart or some gambling chip that someone would buy, you are less likely to make a prudence business capital allocation. How you see thing decides your action towards it. 

Mr. Market

The famous character among value investors from Chapter 8 of The Intelligent Investor by Ben Graham. The concept is to ignore the bipolar market that sometimes seems unreasonable in term of pricing of equity. Sometimes he is overly optimistic and sometime he is also overly pessimistic. Human nature tends to follow the crowd and likely to make irrational judgment which reinforces Mr. Market behaviour. That is not to say that market is not efficient at all. In fact most of the time the market is pretty efficient. The key to use Mr. Market as your servant is not about predicting whether Mr. Market’s behaviour but focus only on business and its value- you would know when to be greedy while other people are fearful.

Margin of Safety 

Chapter 20 of “The Intelligent Investor”. The nature of the investing is about- according to Buffett- predicting the future cash flow of the company from now until the judgment day. However, if you are not that naive you will probably know that is impossible to get an exact number with great certainty. The future is a probability distribution that is better to be roughly right than precisely wrong. These are not a risk whose probability is known but rather uncertainty whose probability is unknown. Therefore we must leave a large margin for error in our judgement. You should always allow for such a margin no matter how certain you are and make sure that your purchase price is much lower than the intrinsic value of the company. For example, as an engineer you need to build a bridge that able to withstand 1000tons of weight even if the trucks that crossover will most likely weight just over 100tons. If you buy an ownership of a business at the price that is cheaper than its intrinsic value, even if you are wrong your losses will be limited. If you are right, on the other hand, you will enjoy a much larger upside- a nice optionality, act only when the odd is favourable to you.

Circle of Competence 

It is the concept that is not from Ben Graham but was added by Buffett and Munger. They believe by tireless effort an investor can build their circle of competence, which will give them insight and knowledge of the industry and company that he is going to buy. This allow investor to have more accurate prediction for the company and industry. 

Knowing the boundaries of your circle of competence is very important. It is not what you don’t know that get you in trouble, it is what you think you know but just ain’t so. In order to be capable to have an opinion on certain thing. you must be able to tell which premises will disprove that opinion. If you are able to do so, your opinion is valid. In addition, it is nearly impossible to every industry and whole economies as they are collective of millions of variables. Fortunately you don’t have to know everything, there are thousands of assets for you to choose and you could just let go most of the things you do not know and still left with many good alternatives. The most important thing is to have a clear line of you circle instead of a blur one. 

For example, the skill that every value investor should know is accounting. Knowing the business accounting policies and how they recognise their revenue and expenses are most basic thing an investor should know. Unfortunately, many will simply use ratio such as P/E or P/B and have the false sense of confidence in assessing the value of a company. 

That is it for today :) hope you will return again.