A helpful stranger pointed out to me the other day that my watch was telling the wrong time. I glanced at the device strapped to my wrist and shook my head. I politely explained to him that my watch might appear be telling the wrong time, from where he was standing. But as far as I was concerned it was spot on. Let me explain. I hate being late. So, I have deliberately set my watch to run 20 minutes fast to ensure that I am always ahead of time. Cunning plan I was never always this punctual, though. When…
A helpful stranger pointed out to me the other day that my watch was telling the wrong time. I glanced at the device strapped to my wrist and shook my head.
I politely explained to him that my watch might appear be telling the wrong time, from where he was standing. But as far as I was concerned it was spot on.
Let me explain.
I hate being late. So, I have deliberately set my watch to run 20 minutes fast to ensure that I am always ahead of time.
I was never always this punctual, though. When I was younger, I was habitually late for just about everything. Someone even joked that I would be late for my own funeral.
Then one day I devised a cunning plan.
I set forward all my timepieces by 20 minutes. It can drive my friends crazy but it works for me. I am now seldom late for anything. I call it my 20-minute margin of safety.
If we look around us, margins of safety are built into many of the things that we use regularly. For instance elevators have cautious weight limits and electrical appliances have carefully-chosen fuse ratings. Nothing is left to chance.
But it seems that when it comes to investing, many of us, for some inexplicable reason, throw caution to the wind. Oh, yes we do.
The first rule
Warren Buffett once quipped: “The first rule of investing is don’t lose money. The second rule is never forget the first rule”.
Some people have misinterpreted Buffett’s quote to mean that we should avoid riskier assets such as shares. But nothing could be further from the truth. That was never Buffett’s intention.
On another occasion, Buffett told investors: “A truck driver should only proceed to drive over a bridge, if the weight that the bridge can support greatly exceeds the weight of the vehicle”. In other words, the driver should factor in a decent margin of safety.
The same logic should apply to investing.
When we buy shares, we should allow a suitable margin of safety. The safety margin can help instil discipline into the way that we invest. Or as Peter Lynch once said: “You have to know what you own and why you want to own it”.
However, many investors tend to focus on what they can gain rather than try to minimise what they could lose. There is a big difference.
Admittedly, a margin of safety cannot protect us from everything. But it could help us avoid shares that we might want to own but might also be overpriced. It could help us to not lose money.
Watch and learn
One useful strategy is to have, at the ready, a watch list of shares that we would like to own. These are companies that we have researched carefully and believe that they would not look out of place in our portfolios.
However, not everything that we want to own may be attractively priced at exactly the time that we want to buy them. And this is where our watch list and a hefty dose of volatility can help.
Over the coming weeks, global markets could be volatile as pundits forensically analyse the Federal Reserve’s statements on monetary policy. But that could also be our cue to whip out our watch list.
Some of us might, for instance, be secretly wishing that REITs such as Mapletree Industrial Trust (SGX: ME8U) and CapitaMall Trust (SGX: C38U) were trading at a decent discount to book, rather than at a premium. Or maybe we have been hoping that our Singapore banks that include UOB (SGX: U11) and DBS Group (SGX: D05) were trading at less lofty valuations.
Well, thanks to volatility that could happen. But will you be ready to embrace volatility or will you be frozen into inaction? Just bear this in mind if you should freeze: Volatility doesn’t turn a good company into a bad one. But it could make its shares cheaper.
I have my watch list at the ready. So, I am ready to give volatility a big hug. That is right after I give the shares I want to buy a great big hug first.
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