Thursday, 12 November 2015

Don't get information overload - keep it simple stupid

If I have to pick one-line that summarizes my investment style its
'I don’t try to jump over 7-foot hurdles: I look for 1-foot hurdles that I can step over'

This quote totally relates to my style of being both lazy + simple. Too often we have been spammed with information about investing such as

'should you care about the death cross?' - No what the hell is that
'Is China going into a recession?' - I don't know, ask Xi
'Should I allocate more to bonds?' - How about you allocate more time to getting a life?

which overwhelms both new and old investors as they struggle to understand everything about the market.
Back then, I used to be like that, digesting all the information that people throw at me and then try to make sense of it. Luckily, laziness soon took over and I developed a method to help me focus my time on the things that matter in investing.

Too long didn't read version (also how i invest)

1) Find stocks with predictable earnings
2) predict the earnings
3) Value the stock using your predicted earnings
4) wait for stock market to do something stupid which allows you to buy stock at cheap prices
5) wait somemore - 80% of success in investing is sitting around and doing nothing
6) buy the stock
7) ta-daa

1. You have limited time but unlimited resources
Sounds obvious, but step 1 is realizing that 'I can't/shouldn't be keeping up with every damn thing, I have facebook to scroll a life to lead. Learn to sift out whats important, which brings us to point number 2

2. Earnings drive stock prices.
Full Interest rates, market outlook doesn't directly stock prices, they potentially change future outlook/or peoples perspective of future earnings which then drive stock prices. When people ask you 'whats your take on interest rates/market outlook?' They are thinking in a wrong way as below

Interest rate movement -> stock price
market outlook -> stock price

When in fact it should be

Global outlook -> interest rate movement -> country specific outlook -> industry outlook -> stock earnings -> stock price

Once you get into your head that earnings drive stock prices, this bring us nicely to point number 3

3. Focus on earnings
Sounds obvious,but people like to predict the first link of what affects stock price such as 'interest rate movement' or read articles about 'outlook'. Firstly not are you wasting your limited time on indirect effects on stock price (remember interest rate movements is like 3 links away from stock prices) but you are most likely to predict it wrongly.

Rule of thumb: The larger the picture you are looking at, the higher chance you are going to get it wrong. If most people are struggling with 1 LINK stock earnings -> stock price, what makes you think you can handle 3 or 4?

Might as well scroll thru facebook, making no decisions is better than wasting time to make wrong decisions.

4. Find stocks with predictable earnings.
Ok so at this point you would have realized that
a) you have limited time
b) you should spend that limited time reading about stock specific news that can help to predict earnings.

The easiest way to make the link stock earnings -> stock price easier is to find stocks that have predictable earnings. As in everyone sort of knows shengsiong is going to grow single-digitsish going forward, but who the hell knows what keppel corp is going to do? If you focus on shengsiong and not keppel, you would find making the link infinitely easier.

5.Zoom in to the top few points you think its important for a company

Ok so now our position is
a) you have limited time
b) care about stock specific news
c) find stocks with predictable earnings

a) and b) is to stop you from wasting time reading not-so productive articles. c) is to narrow down your investment universe to the few stocks that you think have predictable earnings

This step is to ensure once again, you don't waste your effort looking at so many variables. In life, we learned how to prioritize and care about a few factors.

In an experiment, its usually a couple of variables that have the biggest impact on the result
You prioritize your time, allocating more to priorities you care about
You look at ~5 key traits in your girl/boyfriend not 200

Same thing for investments, focus on a few key points that may affect a stock earnings.

6.Find your target price

Easiest step ever, once you have a company with predictable earnings, and you know the key factors that may affect it, go ahead and chuck multiples (historical, industry, whatever number you like) at it to get the stock price

7. Wait

Stock markets aren't idiots (most of the time). If you find a company with easy to predict earnings, with easy to understand factors, chances are its usually fully priced most of the time. But markets like doing stupid things frequently (look at the 'meltdown' in august, the hk rally in april, the 'meltdown' last october) which allows you to pick up these company's at attractive prices.

1 comment:

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