The Best Tip: Learn To Think For Yourself
The Best Tip: Learn To Think For Yourself
I’ve read too many investment books. They all emphasize the importance of thinking independently. They all say: “Here, I’ll teach you how to think independently. Then you'll be able to think independently like me. (Or like Warren Buffett!)” Only one book I know reveals what thinking independently might actually mean. It's "Surely You're Joking, Mr Feynman", by the famous Nobel-Prize-winning, bongo-playing physicist, and it has nothing and everything to do with investing.
Brian posted that comment on My Christmas Reading Wish List last week. I don’t know who Brian is but he gets it.
A few years back I invested a very large chunk of my portfolio in a company with an expected life of four years, beyond which it would cease to exist. It had a management team I didn’t particularly trust and a balance sheet that made the company seem highly leveraged.
Looking back at the sixfold return on that investment, it’s no coincidence that the decision to buy broke almost every rule in the how-to-invest-like-Warren-Buffett rulebook. That’s exactly why no-one wanted to own it. (To put the situation into context, this company, RHG, had a market capitalisation of less than $20m at the all time low. It generated more than $70m of free cashflow during the next 12 months).
There is much to learn from the investing greats. None of it will beat learning to think for yourself.
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Dear Steve, thanks for the advice through II at the time. My average buy cost was 17 cents and I had started to sell some when they announced the buy-back. As an ordinary person it would never have been on my radar. In fact the general press was so negative I would have run a mile.
The point being most people can't do the leg work required to find hidden value as you and the II team did here. Also, I don't think people like me who run small portfolios and DIY funds should regard ourselves as independent or intelligent because many of us rely on experts such as yourself and literally sit on your coat-tails.
By-the-by whenever that RHG money comes in I will send in a cheque for the II IF.
Until then I've sit on your coat-tails and buy small parcels of whatever pops up in your newsletter.
Yeah and thanks for AEP as well.
Good work.
This is a little off topic but here goes anyway. This same tip, i think, helped me learn how to win at poker versus thinking but uncreative opponents (winning versus poor opponents is not too hard with a bit of thought and practice). Learning to think independently of others helps you take the next step by understanding the thinking of others to profit from their mistakes. If all "good players" are following a similar strategy, an opportunity is created. You can't profit from this without thinking independently.
P.S. There is also a saying on poker forums - TVBP - Thinly veiled brag post :)
James, this idea sounds similar to the 'Keynsian beauty contest' I mentioned in my latest Telstra review. Look it up if you have a few minutes...
Hey Greg,
That's definitely what I was on about. I go through similar logic when i'm trying to decide which toilet cubicle in fitness first is likely to be the most unused. The one furthest from the door because it is far away or the one closest to the door because other people will use the one furthest away most because they assume most think it is the most unused.
I'm a bit worried by II's SELL recommendations on RIO and TLS.
I bought Data3 (DTL) a couple of years ago for $6.90. Everytime I try to get some opinion on it they say it is too small a company to cover.
Its fully franked dividends have steadily climbed each year, even through the GFC. So I bought a few more. Today they closed at $14.29.
Some of the best opportunities are in the small caps but most financial wizards don't cover them. So I practised some independent thinking.
Chris.
You said it Steve, thinking for yourself will always beat the "how-to-invest-like-Warren-Buffett rulebook". I suspect those 'investing greats' would not recommend replacing principles with ANY 'rulebook'.
I'm sure you agree it's not an 'either or' proposition. Rather we need to do both, learn principles from the greats AND learn to think for ourselves. Warren Buffett himself did the same thing with the teachings of Ben Graham. And what's more he had the humility to credit much of his own success to him - despite his very well demonstrated ability to think for himself.
BTW, congartulations with RHG!
For those of us who have trouble thinking logically I recommend reading two books by Roger La Salle. I think Roger worked with INNOVIC (Victorian Innovation Centre) at some stage and was introduced at a conference as a futurist. His books are - THINK NEW - and - THINK NEXT - and they set out a matrix to assist structured thinking to provide solutions that are "outside the square". The process is more focussed on business and industry and I have not yet decided if I can adapt it to investing stratgies.The publications are available from Rudders RLS Pty Ltd, 156-158 McGowans Road, Donvale...Vic...3111
Steve
Couldn't agree with you more in terms of the gist of this post.
One comment i would make though...
"...broke almost every rule in the how-to-invest-like-Warren-Buffett rulebook..."
I would say your RHG investment follows THE NO. 1 RULE from the Mr Charles Munger rulebook:
"Be prepared, act promptly, in scale, on a few major opportunities."
My thinking is that only a long time spent reading and properly understanding concepts of true risk and intrinsic value set you up to be capable of acting in this manner. It is only in the last year or so that I feel i have properly entered this 'correct' skill set and my recent results are now reflecting that.
I owe the Intelligent Investor a debt of gratitude for taking me through my early stages of value investing. I still subscribe but have found my own honeypot in the smaller stocks that TII cannot really cover.
Cheers
Justin
Hi Steve,
Just a shame you had a similiar bet in you fund on photon group.
Nice one that has been and dollar cost averaging down has made it worse.
Totally destruction of wealth
Ashley
It is completely heriticial to make such observations. I am gathering up kindling wood to burn you at the stake.
R
Mike
Reading the tone of comments on blogs can be a tricky business. But i think Ashley is saying Steve compounded his intial Photon error by averaging down. If that is what he (or she) is implying, then it seems a strange contention.
Steve goes to a lot of trouble to be transparent and explain his positions. Anyone reading this thread who hasn't downloaded the Fund's December quarterly report should do so.
To pull out just one relevant quote:
"As for stocks where we received confirmation that we were wrong, Photon is the sole contender so far. At the very least, our estimate of value was out by the $100m increase in deferred consideration payments. Despite recent good news (see page 2) it is likely we were also too optimistic with regard to our estimate of sustainable earnings. Adjusted for the 7-for-2 rights issue made to all shareholders in the September quarter, our average (pre-recapitalisation) purchase price was $0.32 per share.
Given our estimate of value is now in the order of $0.15 – $0.20, we can chalk the initial investment up as a mistake, paying something in the order of two times too much.
We made a subsequent and separate decision to purchase more Photon shares, both in the institutional placement at $0.10 each and since at prices ranging from a low of $0.0551 to a high of $0.0711. This second investment belongs in the ‘jury still out’ category (see opposite) although a positive outcome is looking increasingly likely."
Totally true Ashley, but you will have to accept some terrible outcomes and I have with timbercorp stock and hybrids, nevertheless, PGA with all its terrible news etc, maybe through the worst and totally unloved.
Steve's said on his web-cast that lots of people don't like him, and you have a reason not to as well.
Happy to sit on his coat-tails and bought PGA at 0.077 through to 0.091.
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