Learning To Live Or Deal With Doubts Is A Hallmark Of A Good Investor

Learning To Live Or Deal With Doubts Is A Hallmark Of A Good Investor
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 Learning to live or deal with doubts is a hallmark of a good investor by David Merkel, CFA of Aleph Blog

I try my best at Aleph Blog to phrase things in a way that conveys my level level of certainty.  But I have my doubts.  Learning to live or deal with doubts is a hallmark of a good investor.

So as the stock price drops, drops, and drops again, what do I do?  I reread the fundamental data to see what I might have missed.  I read contrary opinions.  Then I ask the question: knowing what you know now, would this qualify to be in the portfolio?  If not, I sell it.  In rare cases, if I think it is unfairly trashed, I will make it a double-weight.  So far, I have not lost on anything I made a double-weight.

All investing involves doubt.  We don’t know the future; we are making educated guesses at best.  Am I sure about future earnings?  No.  Do I know what industries will outperform?  No.  In general I have done well with both, but it is an art, not a science.

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I like my methods, partly because they are designed to live in a world of uncertainty.   Why do I diversify?  Uncertainty.  Why do I do rebalancing trades?  Uncertainty.  Why do I limit my ability to trade, except at mid-quarter?  Uncertainty.  Why do I focus on value and use of free cash flow? Uncertainty.

I could go on and give the same answer: “Uncertainty.”  My methods attempt to thrive in uncertainty by choosing factors and companies that seem to be able to do well given uncertainty.

I don’t always win, but my wins have exceeded my losses versus the market over the last 13 years.  Does that mean I will do as well over the next 13 years?  No.  I mean, I hope I do as well,  but there is no guarantee.  The math on investor performance is such that Bill Gross and Warren Buffett could be random flukes.  I don’t think they were lucky — I think they were skilled.  But the statistics won’t prove it.

I also have my doubts about the US economy.  Is it growing?  Is the labor market healthy?  I don’t know.  Short-term data is volatile.  Wise investors will wait and see, unless they have a differential insight that most others do not have.

I lean toward the idea that things are weak,but I don’t know that for sure.  Thus I seek for contrary data.

This is the life of the investor who has ideas, but knows they might be wrong.   What will happen to my overweight in Energy?  Am I overexposed in Tech and Insurance?

In the end, doubts are a part of investing.  You can’t avoid them, despite hard work in analysis, because you can never know what you missed.

That said, when my doubts grow, and the price has not fallen in tandem, I sell.  My quarterly purge of a few companies lets me express my doubts, but in a reasoned way, not merely responding to a fall in the stock price.

Therefore, be reasoned in your decisions in stock investing, and always be forward-looking, because you can’t change the past.

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David J. Merkel, CFA, FSA — 2010-present, I am working on setting up my own equity asset management shop, tentatively called Aleph Investments. It is possible that I might do a joint venture with someone else if we can do more together than separately. From 2008-2010, I was the Chief Economist and Director of Research of Finacorp Securities. I did a many things for Finacorp, mainly research and analysis on a wide variety of fixed income and equity securities, and trading strategies. Until 2007, I was a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. I also managed the internal profit sharing and charitable endowment monies of the firm. From 2003-2007, I was a leading commentator at the investment website RealMoney.com. Back in 2003, after several years of correspondence, James Cramer invited me to write for the site, and I wrote for RealMoney on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, etc. My specialty is looking at the interlinkages in the markets in order to understand individual markets better. I no longer contribute to RealMoney; I scaled it back because my work duties have gotten larger, and I began this blog to develop a distinct voice with a wider distribution. After three-plus year of operation, I believe I have achieved that. Prior to joining Hovde in 2003, I managed corporate bonds for Dwight Asset Management. In 1998, I joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life. My background as a life actuary has given me a different perspective on investing. How do you earn money without taking undue risk? How do you convey ideas about investing while showing a proper level of uncertainty on the likelihood of success? How do the various markets fit together, telling us us a broader story than any single piece? These are the themes that I will deal with in this blog. I hold bachelor’s and master’s degrees from Johns Hopkins University. In my spare time, I take care of our eight children with my wonderful wife Ruth.

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