Talk At The Diamond Hat Part 1/2

I had a nice chat with a fellow value investor in London who recorded his thoughts on the conversation, and kindly allowed me to reproduce it.

Lesson 1: “There is no single way to invest”

This was not necessarily new information to me as I was aware that investment is a profession that results in success if it is combined with one’s personality and view of the world.

Moreover, if anyone interested in investment or finance ought to read books on names such as Charles Munger, Warren Buffett, George Soros, Peter Lynch, John Templeton and Guy Spier (to name a few ‘star’ investors) then it will be even more obvious that the way these people approached the investment profession was in a unique manner that reflects the way they are as persons: from a very philosophical approach taken by George Soros to a journey seeking method adopted by Guy Spier.

However, Jun Hao confirmed this for me: he made it clear that depending on your aim (stable income, capital preservation, etc.) and on how you see the business world (i.e. how pessimistic or optimistic you are about the future of the businesses that you read about) will determine, generally speaking, what kind of investor you will be.

Moreover, he suggested that in order to improve and regardless of what path one chooses to take, reading a wide variety of books, company reports and other materials is necessary – I could not agree more on this point: reading is one of the keys for life-long success.

Lesson 2: “The future is unknown”

Nothing surprising here – some might say that this is an obvious comment. And yet, so many of us tend to allow our emotions to control our faith in our convictions: I recommend to anyone reading this to buy and ready thoroughly Influence by P. Cialdini and Fooled by Randomness by Nassim N. Taleb.

These two books will clarify why we are prone to think that the past is a good base to measure the future and why we tend to overly accentuated our faith in statistics, numbers or any form of scientific information. However, Jun Hao explained to me very clear that industries fall and rise all the time: 15 years ago the planet Earth was running out of oil and we were thinking of exploring Mars for resources.

Today, we have so much oil that supply greatly exceeds demand. Moreover, demand for non-electric cars is increasing and the pace of electric cars to punch through the established market of automobiles is still not strong enough to offer a stable projection as to when in the future the majority of the world’s population will be driving electric vehicles: the future is unpredictable. Therefore, focus on the fundamentals of the business and not on market predictions.

Moreover, Jun Hao made it clear that it is important to make the difference between a good investment and a good business: a good business is not always a good investment and a good investment is not always a good business. For example, Jun Hao explained this situation using Tesla as a model. We both share immense admiration for Elon Musk and for his companies.

However, Tesla is hemorrhaging cash!

A quick look at the financial reports will reveal that cash from financing is consistently positive and that the company is losing money for each car it sells – this means that the company has been raising cash to stay out of liquidation. This achievement is attributed primarily to Mr. Musk’s salesmanship skills. However, despite the company’s noble aim and great skills of Mr. Musk, it makes little sense from an investor’s perspective to put any money in this company: a good business is not always a good investment.

Are Investors Financing Elon Musk’s Iron-Man Dream?

Lesson 3: “Emerging markets and information asymmetry”

The reason why emerging markets are an attractive prospect for investors is because more and more local investors have access to the market but they lack the necessary skills, information and experience to actually engage in a fruitful and productive manner in the stock buying and selling ‘dance’.

Consequently, there is high volatility and many, many mispriced companies. The US market at the moment is expensive because the interest rates are low and investors are overly optimistic about the US economy and market stability.

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