I hope you enjoyed last week’s article where I’d shared my notes from Mohnish Pabrai's book, The Dhandho Investor — the low-risk value method to high returns. If you prefer a bite-sized format, check this out.
Today, I’m following up a rather long post, with a much shorter one. Here’s what I was listening to while writing today’s article. Go ahead, play it in the back. 🎧😌
If you’re an investing enthusiast like me, many a time, you’ve gone back and forth about which investing philosophies to embrace, and which to discard. Today, let’s discuss this problem.
Predominantly, there are two kinds of investing philosophies — fundamentals-based, and market-based. Those who adhere to neither of the two, and buy and sell based on a whim or on hearsay, aren’t investors / traders; they’re speculators. But hey, that’s how everyone starts.
Fundamentals-based participants believe that every stock represents a business. And since the performance of a stock depends on the performance of the business, the focus is on finding a good business, and buying it for a low price. So this means looking into sales, profits, growth, management integrity, business strategy, and so on.
On the other hand, market-based participants believe that stock prices can stay incoherent with the companies they represent for long periods; so it’s pointless to actually study businesses. They feel that inputs like — market price data, trading volume, and news — gives them all the necessary information to predict future price movements, with a high degree of certainty. And hence they focus on just that; usually through chart patterns and data-based algorithms.
Both these philosophies have been around for over a hundred years (though with incremental evolutions); and have helped their practitioners amass enormous wealth. Yet, there’s a tendency to think of fundamental-based-investing as an age-old, sage like philosophy, and market-based-investing as a modern, data-based philosophy. If you spend much time on Twitter, you’d often find their practitioners at odds with one another.
Which one is better?
I don’t know.
And frankly, it doesn’t matter.
Both have their seasons; but neither can ensure returns through all periods.
To use a footballing analogy, it doesn’t matter whether you play possession football or counter-attacking football. What matters is, you pick a philosophy that suits your players’ strengths (in an investing sense, that suits your mental makeup), and then you practice and try to improve, every day. Though no style can guarantee perpetual success; but if one is diligent, more often than not, it begets good results over time.
The key isn’t in the choice of investing style. The key is discipline.
Traders who believe stock prices embed all the relevant information, can make money. And so can fundamental investors who pick stocks based on their underlying business. But in the markets, a wonderer always gets lost.
Also, don’t fall for the stereotypes — fundamental analysis can be performed using the most modern tools; whereas some fundamental practitioners can be downright delusional. At the same time, there are exceptionally wise market-based practitioners; and market-based trading techniques that need nothing more than a regular keyboard (no fancy tools).
How does one pick a style?
Simple; try both. Start with the one you like. Learn it. And most importantly, practice it! There’s no learning like learning by doing! If it works, great. Stick to it. Otherwise, try the other.
The internet offers a plethora of content on each. To start with a fundamental-based approach, read this post; it should help you get started. Use it to start analysing a company (you’ll find all the relevant data on Screener). If you arrive at a buying decision, buy that stock through your broker, and keep tracking its performance.
To start with a market-based approach, as a beginner, you’d have to choose between charting and algorithmic trading. For charting, start with this book, and trade through your broker with the help of internet charting tools like TradingView. For algorithmic trading, understand what it is by reading this post. For those with a non-programming background, it would be best to attend formal training to first learn how to code. For seasoned programmers, I’d recommend picking up, this book.
In investing, and in life, indecision causes tremendous harm. We learn far more from a bad decision. Indecision further embeds that very quality into our personality.
Investing is the kind of activity that tends to enthral; but unless acted upon, it resembles a teenager's crush on a celebrity. One feels wowed, but it takes them nowhere.
So move past the eloquent reasoning, and actually get down to investing. This post is as much for the reader, as it is a reminder for me. Earlier this month, I had committed to publishing one company analysis article per month. That’s coming up next week. I hope to do a good job at it!
See you then!✌🏼
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