Lately I’ve been thinking about what really makes a successful investor, which to me means understanding what investing is all about. I posted something similar on one of the TMF paid boards, but thought it would be a better topic here, since it does relate to Saul’s strategies.
Let’s start with the fundamentals. There are 2 fundamentals reasons to buy stocks:
- The company will pay you some of its profits (as dividends) on at least a semi-regular basis.
- The company will grow in time and be worth more in the future. But, you don’t actually get this growth money until the business is sold.
Now, people don’t like to make forever decisions. They may not want to own a piece of a business forever, or until that business is sold. There are a variety of reasons for wanting to sell, ranging from putting the money to other uses to thinking the business is no longer the best place for your money. Hence, the Stock Market as a convenient place for people to buy and sell pieces of businesses came about. Technology has taken the Market from meeting with face to face with brokers to written/mailed instructions to talking on the phone to clicking a mouse.
But having a Market in which to buy and sell pieces of companies creates new opportunities to make money. Now, instead of buying a company to get a share of its profits, you might buy a piece of the company because you think you can sell that piece to someone else for more money later. I think of this as a “second order effect.” And, of course, options on stocks are a third order effect. Instead of buying/selling stock, you buy the right to buy/sell stock, and you can sell that right as a thing in and of itself!
Anyway, what’s obviously happened is that the second order effect dominates much of investing today. Yeah, some people are dividend hounds, and that can make sense as part of a portfolio, especially a retirement portfolio - but the real meat today is the familiar “Buy Low, Sell High.” And unless you’re big enough to get in on an IPO, when you buy you’re bidding against other potential buyers.
And so what I believe it comes down to is whether one can predict the future of a company’s business better than other people can. For instance, TSLA used to be cheap because most people thought that no-one could be successful starting a new car company (after all, for many decades many had tried and failed), much less an electric car company, much less that company being run by people with little to no automotive experience. But, when Model S was successful, more people thought the company could be successful and so were willing to pay more to own a piece of the company. But now, with TSLA over $200/share, is too much of the company’s potential already priced in?
Similarly, Amazon doesn’t pay a dividend and hasn’t had 4 straight quarters of profitability, yet the stock is over $750 a share today. Sixteen or so years ago it was an open question whether Amazon would be a huge success, but today the question is whether too much of the almost universally-agreed future success is already priced into the stock.
Successful investing is out-guessing what hundreds of thousands, if not millions, of people are thinking the future holds for these companies.
And so I believe the challenge for us is literally predicting the future better than other people can. When you think about it that way, it’s a scary thought. There are professionals with lots of people and money resources doing this. Can we amateurs really be better? Are pros really limited by short term constraints hampering their ability to do a great job? Are so many investors emotional that the prices don’t reflect what the odds really are?
And turning this around to all the number crunching and metrics that we use - whether it be P/E ratios, YPEGs, same store sales, whatever/etc. - all the pros know and do this stuff. Does buying Skecher shoes for ourselves really give us an insight into the company’s future better than professionals trading on the same market exchanges? Or, are we fooling ourselves into a sense of security because our instincts happen to be good, as least for some time measurements? I note that Anurag has pointed out that only one of the TMF real money services has produced better than its target index over a period of 5 years or more. In other words, TMF has had some great picks, but they’ve also had some lousy picks, and when they forced themselves into a real money portfolio model their end results were almost always not better than if they had just bought index funds.
So the question I’m grappling with is whether I’m any better at this than Tom, David, and all the other smart people at TMF. Are you?