I used some posts to describe my investment method. Here is a path.
- We evaluate evidence to test hypotheses. In so doing, we are prone to making mistakes. A common mistake is the Inverse Fallacy.
- The Inverse Fallacy is ultimately a Prior Indifference Fallacy.
- The Prior Indifference Fallacy creates confusion between accuracy and support for the tested hypothesis.
- This is especially so when accuracy is not properly measured.
- The Prior Indifference Fallacy makes people believe weird things and explains the power of experts.
- The power of experts is further enhanced by Overconfidence and Confirmation Bias.
- The power of experts creates opportunities for investors who are able to avoid the Prior Indifference Fallacy.
- Good investment opportunities require a Margin of Safety.
- Rather than trying to predict where the price will go tomorrow, investors are better off thinking where it should be today.
- A conservative investor is aware of the uncertainty surrounding his intrinsic value calculation, and therefore requires an ample Margin of Safety. The search for Margin of Safety should be left largely unconstrained. The Margin of Safety is likely to be larger among companies with low valuation ratios and a history of high growth and strong profitability.
- Searching for cheap stocks is a complex job, which needs to be methodically executed through several steps.
- When done properly, it can be a rewarding endeavour.
- The best strategy for an investor is not to prove that a stock will earn a large return, but to prove that it won’t.
- Investing is not about buying good companies, but about paying a good price.
- Investors should be prepared to lose money, but should never lose their bearings.
- Investors should not take the market price as a given. A good price is better than a good story.
- Successful investing requires patience. But once a stock reaches fair valuation, there is no point holding it.
- Examples: Barratt 1, Barratt 2, Elan 1, Elan 2, Meyer Burger, Ferrexpo.
- Videos: Bayes’ Theorem, Prior Indifference Fallacy, Investing.
- It is important to recognize the limits of valuation.
- But sometimes a simple valuation can send a strong message.
- Here is a simple and useful valuation framework.
Investing: Theory vs. Practice
- Bogle’s truth isn’t true: Buffett’s dud
- Paul Samuelson knew better: Run away
- Academics and practitioners’ misunderstandings: Finance Babel
- The root of the matter: Full circle
- Summary presentation