Without question, Amateur Investor stands on the shoulders of giants. I came to investing relatively late in life, awakened by the cataclysmic power of the markets in the tech bubble of 2000. I embarked on a period of study and discovery of investing. I found that the greats of value investing possessed the antidote for the carnage that was the bursting of the tech bubble. Beginning with the greats of value inviting, including Warren Buffet, his teacher Benjamin Graham, and many other investors and writers, I iteratively honed my own approach.
I will take Benjamin Graham’s definition of investing as a minimal definition of investing as opposed to speculation:
“An investment operation is one which upon thorough analysis promises safety of principle and an adequate return. Operations not meeting this are speculative. ”
The fact is, successful Amateur investment requires more considerable studying, reading than the complete novice might desire. The possible exception to this is investment by the formula of Volume Cost Averaging.
And yet in my own experience various things have become apparent:
First, the investor who is prepared to spend a few pleasantly enlightening hours per week learning how to invest, and who has the requisite psychological approach, can obtain better than average results.
Second, he or she can obtain these much more efficiently by focusing on common stocks of companies which have certain attributes which allow them to earn better than average earnings for a prolonged period of time. Moreover, they progressively increase the ratio of their gross margin over time. I call these Eternal Companies, because they perpetually put their growing earnings to use strengthening the Company in a self-reinforcing virtual cycle, alongside growing benefits to shareholders
Eternal Companies are wonderful, but they are no mystery, and can be identified by a due examination of available financial statements, consideration of the economics of their business, industry and the company’s position in it, and other FACTS.
A key advantage over those will not beat the market, is the Amateur Investor learns to distinguish economic FACTS form wishful thinking. Coming to terms with the compelling reality of actual costs has the effect of drastically thinning the universe of investing opportunities , allowing one to focus on the rare Eternal Companies. The Amateur Investor finds that professional analysts often say “YES”, when they mean “I DON’T ACTUALLY KNOW, NO ONE DOES, but I will say yes because it sounds much better”.
Accepting the need to be emotionally comfortable with the investment is crucial. Because only with confidence in the Company can the Amateur Investor himself endure the vicious downturns in the market which are a central reality of investing. Indeed, particularly for Eternal Companies, it is these otherwise anxiety provoking market fluctuations which make possible the purchase at a relatively low price. This is one crucial key to above average returns in the long run.
By focusing exclusively on these rare companies, the Amateur is able to much more efficiently and contentedly concentrate and deepen his knowledge of his beloved eternal companies. A deep knowledge reinforces confidence, contributes to peace of mind.
Confidence and peace of mind in the Eternal Company investment enables the Amateur to hold the investment for a long time. Eternal Companies earn better than average earnings over a prolonged period of time. In order to realize the benefit of this economic power, compounding returns must be allowed to operate for as long as this economic power continues. Thus, psychological comfort with the investment unlocks the final step to realizing the potential of Eternal Company investing.