Investing: Simple or difficult? - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

Investing: Simple or difficult?

Oct 7, 2009

Actually that's a trick question. A simple activity can be quite difficult to do. 'Always speak the truth'-that's a simple dictum all of us learn as children. Yet how many can really accomplish it? Not many, really. In contrast, we routinely do many complex activities rather easily. Take driving for example. It involves complex hand-eye coordination, rapid time-distance calculations involving traffic. Yet many of us accomplish it as a matter of fact. Technique vs. temperament
This distinction is the key to understanding why investing is simple yet difficult. As Warren Buffett put it, "To invest successfully over a lifetime does not require a stratospheric IQ, unusual business insights, or inside information. What's needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework."

This is not the kind of statement you would hear from the average investment professional. In fact, the way the investment industry is organised, one is led to believe that one needs to deploy the most expensive brain power, elaborate data bases, complex models and close ties with companies to succeed as investors. Most professional investors tend to come from great academic backgrounds and put in a lot of effort into their investment processes. No wonder then that their solution to most investment problems revolves around 'smarts'. However, try speaking about 'intellectual framework' and 'keeping emotions in check' to them.

While investing certainly requires a degree of skill and intelligence, it is a mistake to think that more and more of these can compensate for the lack of a sound temperament. As is said in Cricket, players can succeed with flawed technique, but no one succeeds without the right temperament. To quote Warren Buffett again, "We don't have to be smarter than the rest; we have to be more disciplined than the rest." And talking about temperament is a simple enough matter, but difficult to put in practice.

Temperament: What exactly?
The key elements of an investment framework were first laid out by Benjamin Graham. They continue to be valid across the boundaries of time and geography.

  1. Owner's perspective: A stock is not a lottery ticket. It is a piece of business. Hence investors should think like businessmen. It has two major implications:

    1. Track operational performance: Think about your neighborhood shopkeeper or restaurateur. He doesn't bother about what his establishment is quoting for in the market. That's because it isn't quoted on an exchange. Stocks are, but that doesn't mean we should let it become a disadvantage. We should be interested in knowing more about the business and its operational performance.

    2. Long term horizon: Businessmen don't keep buying and selling their firms just because they can make a quick buck. They operate under multi-year time horizons.

  2. Mr. Market: Market is there to serve you and not dictate terms. One should check quotes periodically to see if it is offering some good merchandise at a marked down price. It is a mistake to take estimates of values from the markets. It is an even greater mistake to tie your emotional well being to this decidedly manic depressive creature.

  3. Margin of safety: One should be humble about one's estimates of the future and valuations. After all, we are not infallible. Not even close. That means we should buy stocks only when they are selling at a substantial discount to our estimates of value.

    It may be noted that recent advances in a new field called 'behavioral finance' confirms the soundness of this framework. To conclude, investing is a simple art but difficult to master in practice.

Equitymaster requests your view! Post a comment on "Investing: Simple or difficult?". Click here!


More Views on News

Your Queries on the 8-Year Cycle Answered (Fast Profits Daily)

Sep 25, 2020

You've sent in your queries on my videos on the 8-year greed and fear cycle in the market. I'll answer them in this video.

It's When You Sell that Counts (Profit Hunter)

Sep 25, 2020

How I alerted readers to the impending crash last week.

Can the Nifty Fall to 10,200? (Fast Profits Daily)

Sep 24, 2020

The Nifty has reached an important support level today. If it breaks then we could see further downside.

How to Save Money by Exiting Stocks Before They Fall podcast (Views On News)

Sep 24, 2020

A penny saved is a penny earned. It doesn't matter where you enter. All that matter is where you exit. Watch this video to identify an opportune time to exit your investments and book profits.

ICICI Prudential ESG Fund: Aims for Sustainability (Outside View)

Sep 24, 2020

PersonalFN briefly explains the newly launched fund : ICICI Prudential ESG Fund.

More Views on News

Most Popular

Benjamin Graham Deep Value Stocks

The insights from a man who pioneered arguably the most successful form of investing there is.

Why We Picked This Small-cap Stock for Our Hidden Treasure Subscribers (Profit Hunter)

Sep 17, 2020

This leading household brand will profit big time in a post covid world.

My Top Stock to Buy in this Market Selloff (Profit Hunter)

Sep 22, 2020

The recent correction offers a great opportunity to buy this high conviction smallcap stock.

What Do the Charts Say About Buying Smallcaps Now? (Fast Profits Daily)

Sep 18, 2020

Everyone seems to be excited about buying smallcaps now...but is it the right thing to do? What do the charts tell us? Find out in this video...

How Much Money Do You Need to Be a Professional Trader? (Fast Profits Daily)

Sep 17, 2020

In this video I'll answer a question I get asked often: How much capital do I really need to trade the markets for a living? Let's find out...


Covid-19 Proof
Multibagger Stocks

Covid19 Proof Multibaggers
Get this special report, authored by Equitymaster's top analysts now!
We will never sell or rent your email id.
Please read our Terms


Sep 25, 2020 (Close)