Five Core Stock Market Investing Beliefs

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I wished to share the fundamentals of this investing channel by sharing my 5 core stock market investing beliefs:

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  • the markets are not efficient - the efficient market hypothesis doesn't really work in the long-term and is something we can take advantage of.
  • long-term attitude - everybody is so focused on the short term and not on the long-term but the long-term really matters. Of course you can't forecast what will earnings be in 5 years, but you can forecast what will be the competitive advantages, the growth, the fundamentals, the risk etc. A long-term perspective tells you what will likely be the better investment in 5 years, that is all you need.
  • value or growth? Why not both? Growth is an essential part of value!
  • Research, research and research - the more stones you turn, the more ideas you can find that the market doesn't even see because it is myopic.
  • Hyperbolic discounting - everybody wants to double their money in two 3 years - if you want to double your money in ten years, you have an advantage and you will likely double it in 5, buy you must keep targeting doubling it in ten, not five. that is crucial.

5 Core Stock Market Investing Beliefs

Transcript

Good day fellow investors. We have recently passed an amazing number which is 71,000 subscribers on YouTube. And to introduce myself to all the new subscribers and future subscribers, I thought that I would share my five core investing beliefs, which is probably the reason why you are subscribed to this channel and why you like this content. And therefore one video where I summarise what is the fundamental thought of this channel, I think will be enjoyed by you all.

So the fundamentals of what I do are, knowing that the markets aren't efficient, so that's one. Then having a long term view, having a long term investing view, which means from beyond 2-3 years because all the market is focused on next earnings quarters, where will the price of oil go next six months? What will happen to the man next year and I'm thinking more okay, what will happen to oil in the next 5, 10, 20 years and how will that impact my investing? That's what I do. And that has given great rewards to me over the past. And I'll also discuss a little bit about myself and my historical investing journey and how I came to those five investing beliefs. Further, there is still research, research research, the more research I do, the more I know, the more I understand what's going on. And then one more technical little thing that comprehends everything, and that is hyperbolic discounting. Which we'll see how it works, and how it gives you an advantage as an independent investor.

So let's start with the efficient market hypothesis. It was created 60s-70s by Eugene Fama, Kenneth French, and promoted mostly by them, and it states that the stock price reflect all available information at that moment, and that there is no point in doing anything. You just have to accept the stock price. And the reward will be given by the market, you cannot beat the market, you cannot know what will happen in the future. And anything you do any thinking is worthless. That is the efficient market hypothesis works perfectly with people that are lazy. That's the majority of people. So, okay, I don't have to think, thank you, you're giving me something that I don't have to think about. Give me a pill to cure all my illnesses so that I don't have to think about being healthy. I don't have to exercise. And that's typical. And that's why it works so great. It's easy, it's simple, and everybody loves it.

However, as what Buffett say in his 1988 letter to shareholders, in any sort of a contest, financial, mental or physical. It's an enormous advantage to have opponents who have been taught that it's useless to even try. And then the funny thing is that this also reflects in French and farmers data they have analysed they have said okay, the markets are efficient, then they have analysed, what's the difference if I buy value and if I buy growth stocks based on price to book values, what's the difference in long term returns? And the answer is that if you buy value, you have better returns, which means the markets are not efficient, as they think they are. They have improved their formula later with the 5 factors. But still, if you are an independent investor with a long term objective, you can do better.

If we just take a look at their data. If we in 1926 invested in growth stocks, growth stocks are categorised in their data as stocks with the highest price to book value the 33% of the market with the highest price to book value $1 would turn into something like $100 in the last, what, 95 years, however, if you invested in value stocks price to book in the lowest 33% of the market, $1 would turn to more than what a 100, probably something like 100,000 on this chart, I don't know the exact data. And now it's probably a little bit less because growth did well. But this tells me that over the long term, I can do well and I can do better the market, if I follow certain guidelines, which we'll discuss in a moment and if I work hard on doing research.

So as what Buffett say it pays a lot to just work hard, and it pays even better if everybody else thinks that there is no point in working. Now let me explain this. My simple, common sense application as we said, grandma style or fat Tony and style is are you buying the stock or the business. Everybody looks at these stock prices. Stock priice is going up and down. Of course, that's efficient in the short term news, stock price goes up, you can do nothing about it. But if you simply change switch your mindset and say, okay, I'm going to buy a business. Just think of a restaurant down the street, of a hotel. Well, maybe not now, but long term or something like that. Something that creates cash, monthly yearly basis, that there is no quote on it. Okay, I'm the owner of the business or you are owner or I don't know what, and then you say, okay, what's the value of that business? What's the business return? Then you don't really care about what happens in the market, except for when you want to take advantage of the market situation.

For example, this is the S&P 500 earnings. You see the trend is clear the red line, however, the earnings depending on the economic situation went up and down constantly. So that is normal businesses are volatile, nothing is linear. But the long term trend is pretty clear. And this crisis shall pass too. Just to emphasise this, these are the corporate profits after tax in the United States, look at that volatility, look at the drops that are normal, but also there is a clear exponential compounding trend and that's what you are investing in. When you are happy with the business return, then you are an investor. And then as an investor, you look at the long term and the long term earnings, and that's pretty stable line. But the market will give you opportunities to buy low, and if it's really exuberant to sell high.

Let's just take another look at the s&p 500 over the last 40 years. We have a clear trend of growth, but as everybody is focused on the short term, let's try to beat the market in the short term. Which I agree you can. The markets are relatively efficient in the short term, but extremely inefficient in the long term. This was also the topic of my PhD. The longer the period I used to make an analysis, the more inefficient the market was, or the more efficient for me as a common sense investor. Just look at the trend, the growth, and then you see how irrational investors are in 2007-1999. They were happy to pay 1500 points for American businesses in the S&P 500, just two years later, they were unhappy to pay 700 or 600 points. That's 50% lower. Why? Just because the outlook there was a recession which is normal things in nature. And then also depending on interest rates, what else is there, they are happy to pay 3000 points a few months ago, now a little bit less, then a bit higher, and it's really so volatile. But as an investor you look at the businesses. You own what you own, you know that, I don't know, if you own a house and you're renting it out, you know that 90% of the time it will be used, but 10% it will be vacant. Every real estate investor knows that, that 10% of the time, you won't get the money for the renting out. So that's something you have to implement into your calculation. There goes the value of the house. And that's how investing is done. And if you have such a mindset, then you can beat the efficient market.

We don't know what will happen in the next six months. When will this situation ease, when will be come to normal. Somebody says it will take three years somebody says it will take 12 months. And everybody's panicking and you see all these situations. Just comment on the oil price, which is interesting today, over supply, no demand, and then simply the price goes into negative to $35. That's common just in an energy market. In Germany if it sunny and if the wind is strong, then energy prices are usually negative, because it doesn't pay to stop those windmills and solar panels to shut them down. And it's simply based to sell the oil for a lower price. The oil market there are plenty of traders, gamblers, whatever, crazy and if those get margin calls or something like that they were forced to sell and then you have this drops back. When the situation stabilises, it's likely that there will over the longer term be, again, a good balance with oil prices, a fair balance for producers and purchases. You just need to see the long term and have faith in the world. And that requires patient research. And if you think long term you have the advantage to see what others don't be greedy like in 2009 when others are fearful and fearful when others are greedy.

Now the first pillar of my content is value. I call myself a value investor and then you think okay, but growths and what about growth? Well, value growth is an essential part of value. When I value a business, I look at the cash flows from today till Judgement Day As with Buffett say. If those cash flows will be growing, then I have to implement the growth into my calculations, and that increases my fair value. So, when somebody says value or growth, I say, both, and that's also in life, if you have a both mentality, you have so many more options. So, of course, not growth this company is losing money, but it's growing 50% it will probably never break even but it's growing. Let's buy that. No. As I said, both value and both growth in a good business model and if I look good, you'll see that you can find growth and value at the same time and those are usually the best investments.

How to find both value and growth, well, it all boils down to research. Buffett was once asked how does he find those great investments? And his answer was, well, I usually start with the ace. So that's what I do. This week, I'll be researching the steel market, steel stocks to see how those feeds long term opportunities, long term investment opportunities. And then next week, next week, something else I have Norway also on my list, good businesses, etc, etc. And the more I researched, the more I know as investments so that investment knowledge compound for the long term, and I'm happy to share this on this channel, where we do stock analysis. One stock market news with a long term twist per week, and we discuss investment mindset, as we are doing now. So if you haven't, please subscribe to this channel and click that like button for the YouTube algorithm to support the channel. Thank you.

Then the final, a little bit more technical explanation that takes into account everything that I do, as said the market is focused on the short term. So they value everything in the short term more than that they value something in the long term. And here you have two lines. One, the red one is the hyperbolic discounter. And you'll see how it doesn't make a difference much more into the value that comes into the future. However, that is what compounding is, that is what investing is. And the exponential discounter doesn't really apply much value to something in the short term, a big difference. But you know that in the long term, the value starts to compound in what happens 3-5-10 years really matters. The market doesn't care what will happen in the next 2, 3, 5 years. If some company is making a great investment now that will pay in 2, 3, 5 years. down the road, the market doesn't care. If some company I don't know has issues now with the oil prices down, and they will model the all the environment, all the stocks as the recession and oil prices will stay down or negative forever. And that's something so surprising when things are bad, analysts are pushing down their estimations of prices of valuations. When things are going good, they're pushing them up, instead of doing the opposite, and trying to find a long term balance. And that's also connected with hyperbolic discounting.

We as humans are wired to focus more on the short term and give more value to the short term instead of the long term. And I think when it comes to investing the discrepancy is somewhere between 2-3 years. I look at businesses. I look when I find a great business that will be great from year 3 to year 10 from now, then I know I might find some real undervalued gems. And you'll see how that works just in a moment. So this is when I started investing in 2002. I come from Croatia lived the first 30 years in Croatia. And I started investing when the stock market was at 1000 points. It was already 3x up from the bottom in 1999. But I was looking at businesses, found a business that I liked. So I think the first businesses was the price earnings ratio of 7 and dividend yield of 5% and 10% growth that is what was I buying in 2002. 2002 to 2004-5, nothing happened then I was just buying more and more and more because I wanted to be an investor I wanted to have a million in stocks have 5% dividend and retire at 25, 30, 35 whenever I hit that threshold. Fortunately for me, the market suddenly changed. And by 2006, Sven was 23 and extremely rich, the dividend didn't grow that much, but my stocks went up five to 10 times that was a crazy environment.

I sold both the boats, started the PhD, invested a little bit in myself, in my education and invested also a little bit in the United States, was down like everybody else. 30% in 2008, when I sold some brought back to my own market and I was buying big from 2009 to 2014. Because I again, so nice businesses, this was my best stock 70% of my portfolio. 2009 from 2012 I remember buying it exactly that dip 2009 a little bit and then when I had the money up till 2014 a little bit higher, I will went in buying because it was a great business 10% growth per year price earnings ratio was really low. 7 or something, the dividend yield was 8% and I thought, okay, that's something I like, that's something I can own forever. So I'll just keep buying, putting paycheck by paycheck by paycheck. And then the market again rewarded me by pushing the stock up 3 times. When we decided to move to London, we decided to do other things. And then of course, I sold we bought the house, invested more in education, etc, etc, invested in other businesses, other stocks. And the moral of the story is always when you find a business that you like, and you want to own it forever. You buy it, and especially if it's a great long term business, and that's why everybody's saying long term, because most people don't see the long term. That's why they are focused on the short term they have to pay, who knows what their mortgage, they are selling, putting the prices is down in panic and that's the best time when you can buy and that's what I did and I keep doing that. And I think that sooner or later I'll be reward. Lead by owning great businesses that I never have to sell or buy a change in valuation that if it happens good, if it doesn't happen also good.

And in 2017 I started this YouTube channel so really having a lot of fun happy sharing, doing a bit different, I started writing articles in 2015 when I was an accounting professor in Amsterdam. The summers were free so I said okay, this summer I'll write try to write the book some articles share my research. And from then I started to write more, more research more, do more, resign as a teacher and do this as a full time stock market researcher. Thank you for watching. If you have any question, you can always send me an email or contact me or check my page. There is more about me. My book free investment course for everybody where all this educational content, I tried to put a video and also write it in a paper so that you can always come back and learn more about investing. There is also my stock market research platform for those who are interested in my portfolios, and I'll talk more about those tomorrow. Thank you and I'll see you in the next video.

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