This will matter at some point …

Investment Perspective – November 2017

Peter Flannery CFP AFA

 

 

“Neither the investing method nor the fundamentals of the business are right or wrong because the mood of the market is favourable or unfavourable toward the “stock”. That is because when you really think about it, “stocks” (shares) are all about the financials and the trading price, the share price… the cash up value. What matters more is the economics of the business” 

Peter Flannery

 

So, to be reading this, you are likely a conservative investor looking for growth, rather than a defensive investor trying to keep your money safe, unconcerned about the return on your money. 

Your opportunity then (or is it your burden?) is to maximise returns whilst keeping your capital secure, especially in the long run.

Luck is a factor in our success or failure no matter what.  This is especially true in the short term.  Longer term though, other factors, such as methodology, discipline and persistence can have a greater impact on the returns that are achieved on your investment portfolio and ultimately, the money that you make. 

 

Choose certainty over uncertainty

Until you settle on a methodology and follow it with real discipline, the chances are, you run the risk of jumping from one thing to the next. 

Many years ago, for some, it was cherry farms, for others, it was ostriches, some followed the gold price up and all the way down. At one stage, some even invested in goats.  More recently it is crypto currencies.

Ironically, money in the bank is by far the favourite investment of New Zealanders.  That said, money in the bank is not an investment, nor is it the store of long term wealth but rather a holding position or a place to park funds whilst they await redeployment elsewhere. 

Investing in bank deposits or fixed interest is uncertain because rising costs eventually overcome the earning capacity of fixed interest, rendering both the capital and the income off the capital worth less and less as time progresses.  There are times when this is less apparent although long term it is almost inevitable.  

Certainty is investing in either real assets, such as real estate or productive assets, such as businesses that have a sustainable competitive advantage.  That’s certainty. 

The pricing of those assets is subject to market sentiment.  It should not be confused with the calibre of the underlying asset and the power of the sustainable competitive advantage.

After all, we are not speculating on the trading price, we are investing in the underlying business.  That’s why treating the trading price as the value of your investment is incongruent with our goal, especially short term.

We cannot control the trading price.  The market, which by the way, is often out of control, controls the trading price.

That is why many people don’t like / trust “shares”.  Amusingly that is why value investors like them.

The trading price is the “score card”, the result if you like.  It is certainly not the driver of investment success.  That job is down to you and I. 

Luckily it’s not complicated.   We have a fundamental (proven) methodology, systematic discipline, the maturity to be patient, listening to what the market is saying and the wisdom to buy good businesses, especially when others won’t (if we are lucky and patient).

Keeping the score is prudent but can only take you so far. 

Investing in good businesses at an appropriate price is smart and can take you a long way.

 

“What should happen is different from what will happen. The most probable outcomes fail to happen all the time and even if they happen, they fail to happen on time.“

Peter Lynch 

 

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