Do You Know What’s Important & Knowable? by Investor Vantage
“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”
When it comes to the stock market and investing, there are several tips and tricks that experts can express to new investors, but by far one of the most important pieces of strategic advice is to focus on what is important and knowable. There will never be a chart that tells you which investments will pay off and which won’t, which means that every investment has a level of risk associated with it. Choosing ingredients that are important and knowable might not bring you guaranteed success every time, but it certainly offers less risk and more simplicity than those which cannot be known or understood…
On April 9th 2021, Bruce Greenwald, the founding director of the Heilbrunn Center for Graham and Dodd Investing at Columbia Business School, sat down for a Fireside Chat with Li Lu, the founder and chairman of Himalaya Capital as part of the 13th Columbia China Business Conference. Q1 2021 hedge fund letters, conferences and more Read More
Not Everything That Can Be Counted Counts
One of the world’s best-known investors, Warren Buffett, has recently explained that most investors make a key mistake in their investment strategy. This mistake is that they put the emphasis on what they can know, but not enough on whether or not it is important. There are plenty of things that we know, but many of these issues really aren’t important. We know that the sun will come up tomorrow, but we cannot influence it and it doesn’t have an effect on how to invest either. So, although we know it, is it important?
When you invest in the stock market, you need to think about the things that are most important, rather than on what will happen and when. You need to learn things about the specific company that you are following on the stock market. A company that is doing well financially, that has a popular product and that has an excellent management structure is a company that you should look at investing in. If a business has created sustainable competitive advantages which produces tons of free cash flow, has readily attainable catalysts, reasonable debt levels, a competent management team and trades at a reasonable price, then not a whole lot else matters when it comes to investing. It doesn’t matter what else you know about the company, so long as they fit in with your personal strategy. That is what is important.
It is very important to find the balance between important and knowable, since you need to know a number of things about the stocks, company and market before you are able to decide whether or not something is also important. As Greg Speicher says,
“It is useful to think about the world in terms of a four-quadrant matrix where the horizontal dimension comprises what is knowable and unknowable and the vertical dimension comprises what is important and unimportant.”
The two boxes in that matrix you must avoid are the knowable but unimportant box, as well as the unknowable yet important box (in addition to the unknowable and unimportant box). Anything that falls in one of these two areas should be ignored as much as possible. You will never be able to figure out how to invest if you focus solely on things that you can never know, even if they may seem important (if you do, you may as well go to a Las Vegas casino), or on things that don’t matter anyway (that would be a complete waste of time and energy).
Moving Away From Macro Stuff
Too many of us still focus strongly on the macro stuff. We feel it is a safer bet, something that we can control better. However, it really shouldn’t be part of your investment strategy, if you want to see real positive effect on your finances.
Is it important and knowable? If it is not both important and knowable you move on to the next idea. The macro environment is very important, but it is not knowable to any high probability. Therefore I pay very little attention to it. Our time is better spent elsewhere.
Of course, the real difficulty is identifying whether or not something is important. Because of this, you could spend an inordinate amount of time getting to know things that may not matter in the future. It is for this reason that no market expert is able to really predict what will happen on the stock markets with any real degree of consistency. This is because as much as we can know certain things, we cannot know everything and much of it isn’t important anyway.
If you want to invest in stocks, you must think long term. If you understand this, you also understand why your portfolio will grow and shrink over time. That is something you know will happen, and something that is important as well. The importance of holding over the long-term through the “ebs and flows” of the market is the key to long-term thinking and compounding investment success.
By focusing on this important concept, you understand that the businesses you invest in will likely be worth more 5-10 years down the line, than when you initially invested (even if the stock drops at some point). Investor’s shouldn’t let short-term trading and market fluctuation get in the way of your long-term thinking.
The reality of the matter is we cannot know what stocks will do in the short-to-intermediate term. It’s important to know, but it is inherently impossible to know with any high degree of probability. So it’s a waste of time to devote too much time to it.
What you can know is whether or not a business has sustainable competitive advantages, as well as high quality assets and a high probability of producing free cash flow into the foreseeable future. These are factors every investor should focus on, and will carry the majority of the weight in determining investment success.
If an investor does’t allow the market to compound investments over time because they want to trade actively, investors are cutting yourself off at the knees.
Remember: The market is there to serve you, not guide you!
Being armed with certain numbers and characteristics which are both Important & Knowable can help an investor focus on what’s matter’s most to the business and the investment. The rest of it is just “noise.”