Wednesday, October 25, 2006
Intelligent investing is like farming
For people who practice intelligent investing, they are like farmers. They plant seeds and wait for the crops to grow. At all times, the harvest is heavily dependent on the weather. It can comes early or a little late. If the crops are a little late in starting due to adverse weather, they do not tear up the fields and plant something else. To do so will be akin to double diaster. They just sit back and wait patiently for the crops to pop out of the ground, confident that it will eventually sprout.
However, for most investors, they do not take the attitude of the farmers. Most people seek instant gratification in almost everything they do including investing. When most buy a stock, they expect it to goes up instantly. If it does not, they sell it and get something else. The majority are akin to the drivers on the freeway, zooming in and out to get ahead of others. Sometimes they are ahead just for the moment, then bam "they collide head-on.
Another major difference between Intelligent Investing and the herd or unintelligent investing is Intelligent Investing requires the mettle to buy those stocks that the majority do not want to own. These stocks are out of favor, unsexy and frown upon. Of course, they are. If not, why else would they be cheap? When you go to a cocktail party and the talk turns to recent stock picks, one guy says "I bought so and so tech stock at $8 in the morning and it closed at $10." Instantly, he appears to be a genius. Forget about so and so tech stock has no decent sales, no profits to show for, no track record and is a diaster waiting to happen. Then you feel a little foolish to say "I bought so and so stock at half of book value and 6 times earnings." Most likely, you'll be greeted with a big yawn and frown upon. Sex sells even in the stock market and most want to own the latest sexiest issue. ICBC being the most recent. We shall see what it will produce. People will be correct in the short term, but in the long term, fundamentals will correct all unjustified valuations.
Why is it that only a handful of people practice Intelligent Investing? Firstly, Valued stocks are as exciting as watching grass grows. Then there is nothing sexy and sophiscated in Intelligent Investing. Conversely, it is supposedly to be sophisicated in the unintelligent way of investing where many mistake the more sophisicated it is, the better it is for the returns. Too many lack the key ingredient which is patience and too often, they do not read or study enough to understand what it takes to succeed. Then again, the iron rule in life is only the top few make it to the top. So as always proven historically, the top percentile are made up of investors who practice Intelligent Investing. That is why there are always few people who do it the correct way. If everyone were to do it correct, Intelligent Investing will cause average returns.