The Art of Investing

By | October 15, 2018

Buy Low and Sell High

We were commenting in April this year about possibility of a bear market start back then. It was too early but anyway that was our pastime hobby, not part of our strategy. So it did not play any weight in our investment considerations.

However, the key principle is to maintain discipline in any kind of market environment: you should not let others talk you into buying overpriced securities because of the heat of the market, you also should not stop investing just because people around you are running panicky or you have fear from the market declines or news headlines.

Use your target required return as natural regulator: if the underwriting return is thin, don’t talk yourself into buying because you can tweak the growth rate to make return look better. You need to be objective and derive a “normalized earning power” from the company’s prospects and then measure against your required rate of return. If it exceeds required return significantly based on moderate conservative assumptions, you probably get a potential acquisition target. If it doesn’t, that means it is too expensive at this price.

When things are selling off in a panic mode, it is also important to measure against its normalized earning power and see if you can expect an outsized return at current price. That way you will be able to keep deploying capital at lower price levers and stop placing capital at higher price.

In other words, using an object required rate of return to be a measuring stick so you can buy low sell high (or not buy high).

It is just that simple. But it takes years of practice and experience to be able to:

1. Have a reasonable understanding of the business so your assumptions are fair and conservative

2. Have a decent sense of what the required return is that you want your capital to generate

3. Have a mental strength to discipline your action to not be impacted by greed and fear

4. Very basic financial analysis skills (but the more comfortable you are with numbers the better)

5. Some luck and some money

The correction may be coming and prepare it as if you are preparing for Black Friday sales.

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