8 Value Investing Lessons From Beating The S&P 500 Return So Far
7 October 2020
There are many value investing lessons that I have learned throughout these past five, six years.
For today, I thought to share with you eight of the value investing lessons and reflections I have had recently.
I hope it will add some value.
1. The Market is Unpredictable
I have made zero money from predicting where the stock market is heading.
It is too hard to predict the market. So what should we do instead? Make intelligent bets on the business direction over the longer term.
All of my gains so far are from understanding the business, management, and valuation well enough – to decrease my probability of being wrong. This means that we should not take excessive risk by gambling on the market movement for the next week or next month.
In my view, betting on the market’s direction in the short term is a fool’s errand. A lot of money has been lost that way.
But in the long-term (>20 years), my view is that it is likely to go up.
Why do a lot of people still like to bet on the market short term movements when it is so hard to have a high probability of being right? The answer is greed and wanting to get rich quick.
It’s hard to get rich quick, but it is easy to get rich slow.
2. What Matters is We Buy The Stock at A Comfortable Price
I have always believed that we need to always do things we are comfortable doing.
Stock investing is the same. We should only buy a company when we are comfortable with the price.
There is no rush to “must buy” the company today. The company will still be around next month and even next year.
Just make sure that we bought the company stock at a price we are comfortable, we will sleep better at night that way.
3. Buying Great Companies Allow Us to Sleep Better At Night
If we buy great companies, they tend to disappoint us lesser. Somehow, they just do better things, they are more innovative.
Great companies usually have a stronger competitive advantage too, which tends to allow them to earn higher returns on invested capital over a longer period.
Great companies tend to also have longer growth runway.
“It’s far better to buy a wonderful company at a fair price, than a fair company at a wonderful price.” – Warren Buffett.
Warren Buffett’s ability has always been to pick great companies that are undervalued, and he holds it for the long term.
Just like Warren Buffet’s recent pick on Apple is a perfect example of him buying a great company. Apple has a great loyal customer base, strong brnading, sticky eco-system and a pretty good CEO.
What is the one good thing about buying great companies at a reasonable price? IF we have made the right buying decision, sometimes the most important thing to do is to do nothing.
4. But Buying So-So Companies That Turns Into Good Then Great Companies Can Be Super Profitable Too
As both a value and growth investor, I make money both ways.
I love buying great companies.
Sometimes, I also buy a so-so company at a ridiculously cheap price.
What is even better if that so-so company becomes a good company and then a great company. That, in my view, is where a lot of multi-baggers come from.
Think of Apple before Steve Jobs came back the second time. That was the start of the turning point of Apple from a good to a great company.
5. Realizing and Admitting Mistake Fast is Important
We will never be right 100% of the time in investing.
But we make sure we have the proper process, and that process allows us to beat the market consistently.
That process requires us to review our holdings and admit mistakes when we realized we are making one.
“Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be a more productive than energy devoted to patching leaks.” – Warren Buffett
The above quote sums it up perfectly.
Because if we are able to reallocate the cash left from our mistake to winning investment, that will be a much better use of the cash than to leave it in, say, a permanent value trap/losing investment.
6. Even The Great Value Investors Uses Options Wisely
Recently, Michael Burry, the famous big short investor, has 36% of his fund capital invested in Alphabet call options.
Call options are, without a doubt, dangerous.
It is super easy to lose 100% in buying call options.
But it is a strategy I have been carefully studying and applying this year.
So in investing, always strive to continually improve ourselves. There is always a new thing to learn and improve while staying rooted in the unchanging philosophies and fundamentals.
7. Patience is The Most Important of All
“The big money is not in the buying and selling. But in the waiting.” – Charlie Munger
Charlie, a wise investor and the partner of Warren Buffett sums it best.
Patience is key.
Patience in buying at the right price in the right company.
Patience in holding.
And patience in selling at the right price.
Meditation is small practice that I do to help me be more aware if I am making decisions based on emotional reasons or not.
It also helps me to be more patient.
8. Enjoy The Process
Above all, enjoy the journey.
Enjoy the process of investing.
The returns are just a way to keep track of whether we have been doing the right thing or not.
Enjoy the process of learning, reading, and being right or learning from our mistakes.
That is how we become a better investor over time.
Since I started investing on 1 March 2015 (using XIRR calculation), my annualized return as of end Q3 2020 is 22.09% vs S&P 500 return of 11.29%.
Most of the returns so far in recent quarter came from my Facebook position which I am up around 50% and my GameStop position which I am up around 160%.
My two main bets have not paid off yet, which is in Carnival Cruises and Pfizer, mainly long via long-term call options.
So if things go well, I think this year will be another good year for my portfolio but even if it is not, I learned so many things this year.
And I am sure over time, I am going to become an even better investor as I continue to learn and improve.
Was this article useful for you?
If it is, appreciate it if you could take one minute to share the above article on Facebook by clicking here.
The information provided is for educational and general information purposes only and is not intended to be personalized investment or financial advice. We make no promises as to the accuracy or usefulness of the information we present.
Important: Please read our full disclaimer.
I am/we are long on Facebook, GameStop, Carnival Cruise, and Pfizer.
Chris Lee Susanto
Founder of the value investing blog Re-ThinkWealth.com (if you type “value investing blog” in Google, his blog is likely the first one). Being a full-time investor himself, Chris knows that he did not beat the S&P 500 return so far (as of the time of this writing) by listening to stock tips. So, when he teaches, he also doesn’t believe in giving stock tips as it is not sustainable for you in the long run. He will teach you how to make your own intelligent decisions with his 4M1S framework. Feel free to also join his free investment telegram channel here.
More from Chris
1. Temasek Portfolio is Huge. Although I know that Temasek has a huge portfolio, I was surprised to see that it is around the size of Warren Buffett’s. As of 31 March 2020, the net portfolio value or NPV is at S$306 billion. So we have our own Warren Buffett in Singapore, that is […]
Who is Adam Smith? Adam Smith (1723-1790) was a philosopher and economist who was best known for authoring the book An Inquiry into the Nature and Causes of the Wealth of Nations. Wealth of Nations also happens to be one of Warren Buffett’s favourite books […]
As a value investor, as a practitioner of value investing, I am very interested in studying funds I view as an executioner of the various value investing methodologies I myself am very passionate about. In this article, I will list down some of the value investing funds in […]
Being a successful investor requires us to have equanimity in everything we do. There are many benefits to keeping a gratitude journal, firstly, the balance of emotion. Would you rather make $100,000 a year but all your friends and neighbors make $200,000 a year or […]
How do people get rich by investing in stocks? Can we actually get rich by investing in stocks? Yes, we can. But we need to utilize both Patience and Compound Interest in Great Companies. With the proper foundation, framework, character, and skills, I truly believe that […]
Sun Tzu Art of War Quotes “He will win who knows when to fight and when not to fight” – We should only invest when there is clear benefit to do so, do not do something just for the sake of doing something. “If you know the enemy and know yourself, you need not fear […]
In this thinking fast and slow book summary, I will explain to you the various human biases that we have and why it is important for us as investors to understand it. It all begins with a simple premise that we all have two systems in our brain, system 1 and system 2 […]
I chanced upon an edited transcripts from Guru Focus of an interview of Munger and Li Lu in one of China’s top finance magazines. Here are the 7 investing lessons I learned from Charlie Munger and Li Lu’s interview: 1. In investing, patience is very […]
As value investors, a lot of us talk about investing for the long run. But what does investing in the long run really mean? As a value investor, I have had companies that I made over 50% in less than 6 months because that company I owned got acquired. I have also had companies […]
Just finished rewatching all 95 episodes of The Romance of The Three Kingdoms – Although this is a classic Chinese historical war movie that is likely dramatized, there are a lot of lessons to be learned from it – for value investing purposes.  No matter how good we are or how much […]
Today I want to share with you my thought processes when I first initiated a position in Care.com (NYSE: CRCM) on 28 May 2019 – and less than 6 months later on 20 December 2019 – overall at an average cost of $10.07, I sold off all of it at $15.05. My valuation for care was higher than […]
Compound interest is very powerful. It is the interest you get on top of the previous principal + interest you already got. Here are 3 actions you can take to make the best use of compound interest: Invest early – the earlier we invest, the more powerful the compounding effect […]