The below post is a follow-up article on lessons from the book The Most Important Thing by Howard Marks - Uncommon Sense for the Thoughtful Investor.
You can read the previous post Part 1.
In this post, I have discussed:
We here far too many people saying, "Riskier investments provide higher returns. If you want to make more money, the answer is to take more risk."
But riskier investments absolutely cannot be counted on to provide higher returns.
It's simple - if riskier investments reliably produced higher returns, they wouldn't be riskier!
High risk - high return notion has brought a lot of misery to a lot of people due to the notion that more risk leads to making more money.
In reality risks include:
But, value investors just feel the opposite. High returns are possible with low risk. And, overpaying implies both low return and high risk.
The author's father was a gambler who lost money quite often. One day, he heard about the horse race with only one horse in it, so he made a bet. Halfway around the track, the horse jumped over the fence and ran away. We assume the "worst-case" means "the worst we've seen in the past". But that doesn't mean things cannot be worse in the future.
Over a full career, most investors' results will be determined more by how many losers they have, and how bad they are, than by the greatness of their winners. Skillful risk control is the mark of the superior investor.
2. Being attentive to cycles
Everything is cyclical. Trees don't grow to the sky. Few things go to zero. Nothing goes in one direction forever. Cycles are self-correcting.
Some of the greatest opportunities for gain and loss come when people forget the cyclicality.
3. Awareness of the PendulumWhen things are going well and prices are high, investors rush to buy, forgetting all prudence. Then, when there is chaos all around and assets are on the bargain counter, they lose all willingness to bear risk and rush to sell. AND IT WILL EVER BE SO.
Aaditya is the founder of Aaditya Chhajed Financial Advisory Services, a financial planning and wealth management firm in Pune.
Investors should seek the advice of their financial advisor prior to making any investment decision based on this report or for any necessary explanation of its contents. Future estimates mentioned herein are personal opinions and views of the author. This post is not a recommendation to buy or hold or sell securities. Investments are subject to market risks. Please read all scheme related documents carefully.
You can read the previous post Part 1.
In this post, I have discussed:
- Risks
- Being attentive to cycles
- Awareness of the Pendulum
We here far too many people saying, "Riskier investments provide higher returns. If you want to make more money, the answer is to take more risk."
But riskier investments absolutely cannot be counted on to provide higher returns.
It's simple - if riskier investments reliably produced higher returns, they wouldn't be riskier!
High risk - high return notion has brought a lot of misery to a lot of people due to the notion that more risk leads to making more money.
In reality risks include:
- Falling short of one's goals
- Underperforming the benchmark/ inflation
- Illiquidity of the investments
But, value investors just feel the opposite. High returns are possible with low risk. And, overpaying implies both low return and high risk.
The author's father was a gambler who lost money quite often. One day, he heard about the horse race with only one horse in it, so he made a bet. Halfway around the track, the horse jumped over the fence and ran away. We assume the "worst-case" means "the worst we've seen in the past". But that doesn't mean things cannot be worse in the future.
Recognizing risk starts with understanding when investors are paying it too little heed, being too optimistic and paying too much for the asset as a result.Legends such as Warren Buffett, Peter Lynch, Bill Miller have remarkable records because of consistency and controlling risk better, not just their high returns.
Over a full career, most investors' results will be determined more by how many losers they have, and how bad they are, than by the greatness of their winners. Skillful risk control is the mark of the superior investor.
2. Being attentive to cycles
Everything is cyclical. Trees don't grow to the sky. Few things go to zero. Nothing goes in one direction forever. Cycles are self-correcting.
Some of the greatest opportunities for gain and loss come when people forget the cyclicality.
3. Awareness of the PendulumWhen things are going well and prices are high, investors rush to buy, forgetting all prudence. Then, when there is chaos all around and assets are on the bargain counter, they lose all willingness to bear risk and rush to sell. AND IT WILL EVER BE SO.
There's an old adage "What the wise man does in the beginning, the fool does in the end."
Author's partner Sheldon Stone likes to say, "The air goes out of the balloon much faster than it went in."Investment markets follow a pendulum-like swing:
- between euphoria and depression
- between celebrating positive developments and obsessing over negatives and thus,
- between overpriced and underpriced.
- Combating Negative Influences
- Contrarianism
- Finding bargains
- Patient Opportunism
- Knowing What You Don't Know
You may contact me in case you need to ask or tell me something. I am waiting to hear from you.
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Stay home! Stay safe!
Thank you very much for your time!
With respect,
Aaditya Chhajed
CA, CFA(US) All Levels Cleared, MCom
Aaditya Chhajed
CA, CFA(US) All Levels Cleared, MCom
E: chhajedaaditya@gmail.com
M: +91-9404055222.
M: +91-9404055222.
Aaditya is the founder of Aaditya Chhajed Financial Advisory Services, a financial planning and wealth management firm in Pune.
He loves helping family, friends, and, clients make better financial decisions. He believes learning is perpetual.
He loves reading books, traveling around the world.
He is a commerce postgraduate and Chartered Accountant. He has also cleared all levels of CFA(US) in the first attempt.
Disclaimer:Investors should seek the advice of their financial advisor prior to making any investment decision based on this report or for any necessary explanation of its contents. Future estimates mentioned herein are personal opinions and views of the author. This post is not a recommendation to buy or hold or sell securities. Investments are subject to market risks. Please read all scheme related documents carefully.
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