@Flash wrote:
The notion that reading quarterly reports and such will assure you informed purchases and that informed purchases will have any guarantee of success is sweet but naïve.
I don't think there is any guarantee of success per se in investing, Flash. That language is too strong for me.
Although, I don't think it's as scary as some people think.
I think if one has a short time horizon, then investing can be very volatile at times. But over a decade or more? The proof is in the numbers as they say!
The natural state of the U.S. economy is expansion. One of the things I've learned, too, is that the natural state of the stock market is up. That's why it is so hard to short (i.e., bet against) the market or any one stock, because on any given day of any given year, the stock market will be going up statistically much more on average than going down. I don't know the exact numbers off-hand, but I think it's something like only 1 out of every 4 stock market days has it gone down. Economies naturally expand. People naturally improve their work, make more things, offer more services, etc. It's the natural state of things in a free market.
Over the LONG-TERM, the stock market's direction is up. In that sense, it's "safe." I guess one could always worry about some crazy natural disaster or war or what have you that destroys all of humanity or the U.S. But, I feel like if we want that type of guarantee, then we'd never leave our homes! We could be struck by lightning or randomly killed by a falling rock, etc.
In terms of what makes for adequate research, I have definitely heard push back against Peter Lynch's famous, One Up on Wall Street, as mentioned above. People have said that was at a time when investment houses didn't have armies of researchers as they do today. Lauren Templeton, who is the grand niece of Sir John Templeton (who some say is the greatest investor in all of history), has said that she thinks the edge today is often more psychological than informational. Everyone has such good information, but many people cannot do the "right thing" at the right moment. She has repeatedly said in her investment talks that she's had employees for her hedge fund who had qualifications much greater than her own. They were smarter in the academic sense and had credentials to die for. But when it came time to buy stocks after they had crashed 30, 40, or 50%, they could not pull the trigger. She's told stories of how these workers were scared, despite having all the intellectual knowledge to do so, and were unable to make money for their clients. Some left the field and some became analysts, but did not stay on in management positions of their portfolios. She's said this is very common. When you have to take clients' money - sometimes 10's of millions - and buy a stock that has lost 50% of it's value, it's different doing in for real than studying it in a book.
Lauren, by the way, who started buying stocks in trust from age six, is a natural and relishes (not fear) buying stocks when they have crashed in a bear market or correction. I recommend her talks on YouTube. Very inspirational and educational!
I don't know if Peter Lynch's message about the average person having an advantage over portfolio managers is true or not today. I think it still can be in areas you are very comfortable with and knowledgeable about. But you have to also know your circle of competence (and be careful about going outside of it). My parents owned a small business for 15+ years in a shopping center in which I saw businesses come and go. I saw what businesses failed and which ones succeeded. I know what products my friends and family use and why they like them. I ask people a lot of questions over dinner on products and services they use and their feedback on them.
Peter Lynch was said to have constantly done this throughout his investing career. It's said that if the Queen of England sat next to him for dinner and a person of no reputation were next to him playing with a unique pen in her hand, he would talk to the person with the pen and ask what the product was, why she liked it, what it cost, etc. He made some stock decisions based on informal research of polling his friends, family, colleagues, and acquaintances that he talks about in his book.
He says Jane, Joe, or Bob often have the upper hand in stock picking when it comes to things they interact with and see in their daily lives, because they see these things' popularity first-hand often much EARLIER than Wall Street does. Additionally, many fund managers operate with handicaps. This part, I'm not sure is from Lynch, but it's often said. Fund managers cannot pick stocks for the long-term. If they have two consecutive down years, they can be fired. And their bonuses often hinge on quarter-to-quarter or year-end performance. That means make short-term decisions and many also recklessly chase gains if they are behind near year-end.
Those without those constraints can make better decisions. Lyn Alden, who I referenced previously, says we play different games. Fund managers play short-term games. But, lay investors can play long-term strategies.
As for valuations, you can definitely learn what metrics are most commonly used for stock valuation to see if something is decently priced (or over and under-priced). True, there is some subjectivity there and past performance of a company does not guarantee future continued performance. But, the risk is not as crazy as people might think.
Aswath Damodaran's valuation of Netflix is a great learning example in my mind. I'll have to look it up for a refresher and will post what I mean. He shows easily why Netflix's valuation can be non-sensical just based on simple math. If every person on planet Earth (some 6 billion) bought a Netflix subscription for the going rate, it would still not come close to the market cap and earnings projected/valued in the stock price.
Edited 8 time(s). Last edit at 11/12/2019 06:20AM by shoptastic.