General Info

A stock is a minority interest in a business. The total value of the business (market cap) is the number of outstanding shares multiplied by the share price. 

Mr. Market is a term given to the stock market by Benjamin Graham, the father of value investing. The idea is that the market is somewhat chaotic and isn't always rational, like a person. Hence, we call it Mr. Market. When Mr. Market is depressed, we buy from him. When he's euphoric, we sell to him. 

Opportunities don't come around every day, week or even month. But, they are very likely to come about a few times each year. Have the patience to wait for good pitches and when they come, swing! What is a big bet? Well, it's not 1% and it's not 50%, but it has to start somewhere and we keep building the position as we continue to know the company behind the stock and our confidence in it's future. Your 11th best idea is probably a poor place to put money. Also, having a position be too big can disrupt sleep and poor sleep is never a good trade for a few percentage points. 

What is value? Value is what you get. Price is what you pay. A good way to know if a stock is undervalued is if one can easily determine the future cash flow of the business will greatly surpass the market cap of the stock in a reasonable time frame (< 10years). Will the business return 10% this year? If not, it better return 12% next year or 15% the year after. The further the returns are down the road, the more it will have to return to the owner to justify the purchase price. Buying a stable business at 30 times earnings is not a good value. If it's consistently growing those earnings at 30% and has a strong competitive advantage, we're getting a lot of value for our money. 

How many positions should one own? Well, how many children can we readily keep tabs on? I have three myself and it's a handful. I can't imagine owning more than 5-10 stocks - even if stock analysis was all I did. Also, the other end of the spectrum - only having a couple stocks is very risky and it's hard to keep our equanimity when we see all of our net worth drop considerably in quotational loss. So, try hard to focus the portfolio in order to increase the size of the positions in the stocks that you have the most conviction in, yet own a minimum of 3 outstanding businesses. This will eliminate a constant need to stay up to date on 50 stocks, and let one enjoy their wealth building with a handful of businesses they know well. This is the peaceful path to wealth building.

How much cash should one hold and why? Shouldn't we be fully vested at all times or we're missing out on gains? There are very few times where it makes sense to be fully invested. We're not a hedge fund trying to squeek out a percentage point over the S&P500. We're trying to beat the market by a good percentage (5-10%) to make investing in individual stocks worthwhile. The only way I know how to do this is to follow Warren Buffett and have some cash on the sidelines for great pitches. If we swing at everything, we're going to get an average result. I've found 5-15% cash is a good place to be, depending on the current opportunity set and how well I sleep in any given market condition. Sometimes like the fall of 2022, was a good time to be fully invested as there were so many great deals to be found. Other times like December of 2024 with few opportunities, lean more towards the 15% mark. Find the level that suits you best. Investing is a personal journey.

Investing in bonds is a fool's game, as one has to know where interest rates are going to be profitable in this sector. Stocks will continue to vastly outperform bonds and currencies. Play the long game and invest in assets that will greatly compound wealth over time and don't rely on predicting interest rates or inflation or GDP. Not even the federal reserve can accurately predict short term rates in a few months hence, let alone long term rates. 

One of the biggest mistakes investors make is FOMOing into a stock or selling in a panic. FOMO is fear of missing out. When someone's friend is making easy money on hot stocks, it can be hard not to follow suit and buy on a stock tip. When the whole market gets scared and investors are selling a stock or the whole market in a panic, it can be hard to stand alone and call bullshit and buy more. The more you know the business, the more confident you'll be in making good long term decisions. Most of the time when the market is volatile, the right answer is to do nothing and often the right answer can be the opposite of what your gut is telling you to do. Hold tight, review the financials and play the long game. Remember, investing is a personal journey and each stock is not right for everyone. Find out which stocks suit you best and ignore the herd. The stock should have meaning to you. The management should have meaning to you. The moat should have meaning to you. This is the qualitative side of investing which is just as important as the quantitative. 

In the short run, the stock market is a voting machine based on popular hot stocks. In the long run, it's a weighing machine based on fundamental earning power. Earning power is the stable earnings that a business can expect to output on a yearly basis. Stop paying attention to the stock price, which only matters when you buy and sell. Instead, pay attention to the revenue, profit margins and earnings of the business. Pay attention to the balance sheet and the cash flow. If the business is doing well, the stock will eventually follow - just as the sports team that practices with the most discipline will eventually win. Eventually the market will catch on and appraise the stock accordingly. Have patience as this could take years.

Investing is a lot like baseball and the best major league players bat .300 to .400 - meaning they miss more than they get on base. This is similar with investing. We're not going to bat 1.000. The best may bat .600 or .700 being 6-7 times right out of ten. We're playing with odds, not certainties. The failures can be from poor analysis, poor judgement on the durable competitive advantage of the business or poor discipline from the investor. We are all human and we make mistakes, sometimes revenge buying, sometimes selling due to emotional reasons. We must learn from our own mistakes and mistakes of others, and keep learning with a growth mindset. Enjoy the process. It's not the end goal that will bring the greatest satisfaction. It's staying on the path of learning, mastering oneself and the joy of compounding that will bring the greatest satisfaction.