Picture the scene….
You are sitting in a theatre full of people, when suddenly three blue men appear on stage. They are as blue as the blueberries that sit on top of an expensive cheesecake.
Your eyes are totally transfixed on their strange appearance. So mesmerised are you by their cobalt hue that you are oblivious to the fact that they are also very gifted artistes.
But after a while, you forget that they are different to the rest of us. Their peculiar azure tinge becomes secondary to their musical talents.
So something that started off as an oddity has, in a matter of an-hour-and-a-half, become quite normal.
Something similar happens in the investing world, though it might take more than 90 minutes for us to appreciate.
To make money in the stock market we need to be prepared to act differently, think differently and behave differently. That can be quite hard to do.
We need to be comfortable with doing the things that other market participants won’t do because they are too preoccupied with doing what everyone else is doing.
In other words, we need to go out of our way to find something that nobody else knows.
Unfortunately, many investors mistakenly believe that they need to sell when other investors are selling. They also believe that they should be buying the same thing that other investors are buying. Put another way, they follow the herd.
They have this misguided notion that the market is always right.
But as Warren Buffett pointed out: “The stock market serves as a relocation centre in which money is moved from the active to the patient.”
Consequently, if we are conditioned to buy for non-value reasons, then we are likely to sell for non-value reasons too. That is not the right way to invest.
A simple rule
All there is to investing is to pick good stocks at good prices and stick with them as long as they remain good companies.
The secret is, therefore, two-fold: We have to know the difference between good companies and those that we should never touch with a bargepole. We should also know how to value those good companies properly.
But how do we go about recognising good stocks?
That’s simple. Our investing edge is not always something that we learn from books or read in the papers. Instead, it is something that most of us already have in our back-pockets.
Consequently, we have a good chance of outperforming the experts, if we simply use that edge by investing in companies or industries that we already understand.
Who, for instance, will understand the medical industry better than the people in the healthcare sector?
Similarly, if you are working in the services sector, your knowledge of the retail industry will likely outweigh anything that “experts”, whose heads are buried in spreadsheets in ivory towers, can tell you.
Peter Lynch once said: “My stock picking method, which involves elements of art and science plus legwork, hasn’t changed in twenty years.”
Investing is never about applying formulas or reading charts. It is about bringing to the fore the knowledge that we have locked in our brains.
We need to do what is right rather than what other people in the market say is right.
We have to go into places where other investors, especially fund managers, fear to tread. That requires the courage and the conviction to be different.
I have a simple rule when it comes to investing. I like to invest in businesses that I can visualise in five, 10 or 20 years’ time.
For instance, I have a good idea of what Singapore’s Real Estate Investment Trusts could look like in the next decade or more.
In fact, I had a good idea of what it would have looked like 50 years’ ago, when Orchard Road was a two-way thoroughfare that comprised of low-rise shop houses, two supermarkets, an open carpark that turned into a hawker centre at night, a smattering of hotels and one department store.
The only difference is that five decades ago I was still in short pants and had no money to invest. Today, I still wear short pants.