Each year, new books appear on the newsstands that promise to unpack the secret sauce to successful investing. It is ironical that such books appear each year which means that the ultimate guide to successful investing has not yet been written.
In addition to the slew of books there is an epidemic of listicles these days that offer to distil the habits of successful investors for you to emulate. For instance, all top investors are early risers and voracious readers are frequently cited. As if waking up at the crack of dawn and reading tomes is all it takes to enter the legion of billionaires. While all this self-help literature overwhelmingly focuses on what to do for that elusive investing success, there is scant information on what not to do and as practitioners we can assure you that what you choose not to do is equally if not more important to your eventual investing success.
Before we get into the list of avoids, like in any linear programming problem, it is important to define the objective function. Here we are optimising for superior long-term investing outcomes for a stock-picker. Superior equals comfortably better than inflation, long-term is longer than one full business cycle and stock-picker is a person
interested in investing in individual stocks.
The meaningless aggregates
Every time we are to make a public appearance as investors, the one thing we cram up the night before is market price-to-earnings ratio, headline GDP numbers and its constituents and market capitalisation to GDP. The reason for having to cram up is that we know we will be asked this and since we do not care about these metrics in our day to day investing our memories have to be refreshed. We also pay scant attention to country weights in global benchmarks. However, what most tickle our funny bone are index targets from a myriad of experts. Ralph Wanger in his book A Zebra in Lion Country made it clear to us decades ago, “If you believe you or anyone else has a system that can predict the future of the stock market, the joke is on you.” Though funny in a Wanger way, we take this line very seriously.
The binary global macro
We did a bit of poll for this article among our investor and analyst friends and the top item in the list of Ignores was Macro. Now the term macro is sort of a catchall term that means several things for several people. Understanding and appreciating the macro regime in which one operates is important but what should be ignored by the long term stock picker are events that are made out to be binary in nature – if it goes this way we are off to the races, if it goes the other way we get clobbered. Current Exhibit A for this is Brexit. We don’t have the foggiest idea of what’s going to happen and we really don’t care. Our preferred approach is to use these macro dislocations to get in or out of stocks at price levels that we like.
Market participants obsess over the source and type of money that flows into the market. As we had written earlier, there is a small cottage industry of people who try to predict which stocks will get into which indices and will result in what quantum of passive money flow. People also religiously check block and bulk deal information or try to cajole information out of broker friends to find out who is buying and selling what. As fodder to the voyeur inside, this is fine but treat it like watching an episode of Big Brother – just as that doesn’t affect your life, neither should this affect your investing.
When we were newbies in the market, like ‘degrowth’, a new word that got added to our vocabulary was ‘overhang’.
Though quite familiar with hangover, we didn’t know that overhang meant a possible large seller in a stock because of who the stock price is under pressure. When going through old notes we still laugh over how we described such overhangs as key risks and over time it didn’t matter one bit.
Sell side shenanigans
Our inboxes get mauled every January with investing strategies for the New Year (In a game of one-upmanship, this activity starts in November these days). We don’t think stocks and underlying businesses care for the fact that the calendar year has changed. Neither do they care for analyst recommendation upgrades, downgrades, change in target prices, bonus issues or stock splits. You shouldn’t either.
Delhi-watching is another favourite pastime of the chatterati. What policy makers are doing, likely to do, not doing, not likely to do occupies prime mental space. State elections, coalition math, truant weather, tax treaties are interesting party conversations but don’t let these topics pollute your investing process.
Separately, while caring for the minority shareholders is an important attribute, minority-friendliness is often confused with the number of TV appearances of the chief executive officer. That by itself has no bearing on long term stock price performance. One of the best performing stocks in our portfolio is a multinational company in the auto ancillary space and in the seven years that we have held the stock we haven’t seen the CEO even once on TV.
It is difficult to summarise all the un-essentials in one article but our guiding principle is neatly captured by Paul Samuelson “Investing should be more like watching paint dry or watching grass grow. If you want excitement, go to Las Vegas”. Suffice to say, anything that triggers the same tingle of excitement as the dying revolutions of a roulette wheel, is not investing.
The writers respectively, are managing director, and executive director, Morgan Stanley Investment Management
Extracted from a Morgan Stanley report