“If no one ever took risks Michelangelo would have painted the Sistine floor.” -Neil Simon
“Take calculated risks. That is quite different from being rash.” -George S. Patton
“Be brave. Take risks. Nothing can substitute experience.” -Paulo Cuelho
The verb of experience is defined as “to encounter or undergo an event or occurrence.” Makes sense. Once you’ve done it you have an insight you didn’t have before. As Cuelho said above “nothing can substitute experience.” Experience is a form of autodidactic or self-taught. Abraham Lincoln was an autodidact. He was an attorney and of course POTUS. Other famous autodidact people are Ray Bradbury, Karl Lagerfeld, Abigail Adams, Edith Wharton, JB Fuqua, Malcolm X, JA Rogers, Walter Pitts, Leonardo da Vinci, Booker T Washington, Harry S Truman, Ben Franklin, Jane Goodall, Ernst Hemingway, and yes Bill Gates, Paul Allen, and Steve Jobs self-taught themselves in computer programming.
I would argue that all professional investors are autodidacts. There is no teacher that can prepare a person for the emotions they will have to confront when investing, and investors, even of the same philosophy, may use different ratios or data. An investor like Buffett realized through his experiences with investing that Ben Graham’s methodology of value investing was the most logical way for him to be successful as an investor. Buffett, using his learned value investing theories, still had to educate himself on how to handle his investments and deal with his emotions in a way that worked for him. The education behind value investing is that is reduces much of investing to mathematical black and white results, so it reduces the emotional aspects that come with risking money.
My reading has made it very clear that the most successful investors focus on a few really good ideas and load up on those ideas. Charlie Munger has referenced this idea in his interviews. The saying “jack of all trades, and master of none” is a foolish way to invest. I’ve seen throughout my readings where it is often pointed out how a lot of diversification may prevent losses to the downside, but it also has the same effect to the upside. Using diversification correctly matters.
A similar mistake is putting all your eggs in a few baskets without knowing what the value is of what is owned. In purchasing a single stock this is foolish unless you understand the business better than those running it. Even worse is an investor giving all their money to one investment professional to manage. The exception would be a Warren Buffett, or someone of his caliber, but they’re aren’t many of him around. Many advisors talk about how they are diversifying an investors money by separating it amongst products. Ultimately, the investor is still relying on the opinion of the advisor. The fixed income market is complex like the stock market and the real estate market. The best thing an investor can do read and learn for themselves, and also focus on a few advisors in each asset class lowering this type of risk. Find the best of the best and break your assets up accordingly.
By the way financial plans are only as good as those that stick to them, and of course if the investments you choose cooperate.
EBITDA, enterprise value, operating income, free cash flow, return on capital employed, book value, tangible book value, market capitalization, and many more terms are common to value investing users. These types of data help to define the value of an investment. Knowing what makes up these terms and how to use them to compare companies on an equal basis is what the core of value investing deals with. Just because a company’s stock looks cheap doesn’t mean that the company is a good investment as compared to other opportunities in the market place. Just as there are different styles to swing a golf club, there are different styles of value investing. As in golf the core goal of the outcome is the same for each style of swing. In golf and investing there is no perfection, only the attempt to constantly attain it.