The First Principles of Investing

(THREAD)

Stock investing is a zero-sum game ...

and then there is Fed.

Fight your game opponent, not the Fed.

In fact, be smart, “use” the Fed.

“Interest rates are like gravity in valuation.” - Warren Buffett

Historical average P/E ratio should not the anchor for valuation. Interest rates are.

Low interest rates are okay if they don’t cause high inflation, which have been the case since the 2008 financial crisis.

We have been living in a deflationary era for more than a decade thanks to tech innovations, and there’s no stopping any time soon.

Discounting various scenarios of future cash flows back to present value is the only true valuation approach for ALL investors. P/E or P/book are just some heuristic shortcuts for lazy investors.

Time arbitrage, i.e. having a long-term orientation, is free lunch in investing.

It’s essentially the adult version of marshmallow test.

The reference of value stocks vs growth stocks is absolute nonsense

“GROWTH is simply a component—usually a plus, sometimes a minus—in the VALUE equation.” - Warren Buffett

Value investing ≠ value-stock investing. Any stock can be undervalued.

“Software is eating the world.” - Marc Andreessen, 2011

“Software is eating the world, but AI is going to eat software.” - Jensen Huang, 2017

Literally, few understand this.

‘Tech/non-tech stocks’ is an overrated term.

The more accurate term is ‘innovative/non-innovative stocks.’

Business growth (or lack thereof) are results of a chain of decisions made by the people in the company.

Long the right bunch of people.

In other words, long the right culture.

“Everything is based on opportunity costs. Academia has done a terrible disservice: they teach in one sentence in first-year economics about opportunity costs, but that’s it. In life, if opportunity A is better than B, and you have only one opportunity, you do A” - Charlie Munger

Many investors often say selling is the hardest part of investing.

It’s really not, especially if you understand your opportunity costs very well.

"The wise ones bet heavily when the world offers them that opportunity. They bet big when they have the odds. And the rest of the time, they don't. It's just that simple." - Charlie Munger

“Diversification is protection against ignorance.” - Warren Buffett

"Rule Number One: Never Lose Money. Rule Number Two: Never Forget Rule Number One.” - Warren Buffett

-20%, +25% to break even
-30%, +43% tbe
-50%, +100% tbe
-66%, +200% tbe
-80%, +500% tbe
-90%, +1,000% tbe

Don’t fucking lose money.

Don’t assume the stock market is always inefficient, otherwise everybody is rich by now.

Always assume the market is somewhat efficient (especially in this information era), i.e. it’s hard to outperform. If you wanna be rich, it’s your job to find the rare inefficiencies.

“A wide and deep education about the world, not just about capital structures, corporate business strategies and industry dynamics, is essential to the long-term success of money managers." - Paul Singer

“Be focused on process and not outcome.” - Seth Klarman

Build a good “factory” and let it do the work. If it’s well built, it should on average generate great results.

The greatest edge of retail investors over the Wall Street investors is that retail investors can do whatever fuck they want while Wall Street have all sorts of mandate restrictions, eg. only invest in securities that are investment-grade, highly liquid, well researched, etc.