In the beginning, we all tend to make the same investing mistakes based on the same misconceptions. The sooner you can discard them, the better your investing journey will go.
Here are 5 Fatal Misconceptions about Investing:
1. Buying “Quality” Companies
First, let’s define quality. A quality company to me is one that:
has a profitable business model
a sustainable moat/competitive advantage
good leadership
high-return, internal reinvestment opportunities
If a company ticks all these boxes, it’s definitely a high-quality company. However, such companies (almost) always come at a price. And that introduces the second factor that turns “buying stocks/companies” into “investing” in the first place: Price.
Investing is always about the relationship between Value and Price. Quality is part of value, but one should never buy a company because of its quality without evaluating its price. That’s what investors are starting to do in every mania, and it always ends the same.
"The best company is a bad investment at the wrong price."
2. Buying Companies You Know
This is linked to point no. 1. Most new investors look for companies that they know. That’s a natural thing to do and could become an advantage if used right. For example, if you work in the steel industry, you have a lot more knowledge than the average person (and investor) about that industry.
Unfortunately, most people just end up buying the most famous companies, the top 10 of the S&P. Because they are new to investing, they do what everyone else does.
Instead, you are better off immediately starting to play out your edge. To stay with the steel industry example, look at companies in that industry. You know them better than anyone else.
Often, people think only the big names are good investments; otherwise, they wouldn’t be that big, right? But thousands of small, unknown niche companies outperformed the Apple’s, Microsoft’s, and Nvidia’s of this world.
3. Precise Intrinsic Value
Intrinsic value is the underlying value of a company or stock—not the stock price itself, but what the stock price should be if it is fairly valued.
This concept is at the core of all intelligent investing. If you know it and do not just take today’s stock price as given and an anchor for future price movement, that’s already a major step.
However, intrinsic value often gets confused with a precise number, and that’s not the idea behind the concept. Investing has so many possibilities and unknowns that there is no accurate fair value. But there is a range. And the better your research and understanding of a company, the more you can narrow that range down.
Whenever I write my Research Articles or Valuations, I always mention that all the models I use (DCFs, Reverse DCFs, etc.) are only for narrowing down that range, never to get a precise number.
4. Cloning Superinvestors
Learn from others, get inspired by others, get ideas from others, but never clone them blindly. There has been a trend of cloning superinvestors in recent years, and I think there are many dangers and disadvantages to that.
1. You never know when they actually buy or sell
You only get the reports on portfolio transactions every couple of months. When they disclose a position, it might already be out of their portfolio, especially when it’s a short-term trade on an undervalued company.
2. You never know their Motivation behind buying or selling
The biggest problem is that you know nothing about their investment thesis. You don’t know if they plan to hold for the long or short term or if certain positions might only work as a hedge for others that are not disclosed, etc.
You’re neglecting your Size Advantage
Superinvestors invest hundreds of millions or even billions of dollars. They have to look for opportunities in the large-cap space since smaller investments don’t move the needle for their portfolio or are uninvestable due to liquidity and volume problems.
As a small individual investor, you have access to more and better opportunities in the micro- and small-cap universe. Giving up that advantage is a huge mistake.
I currently own only one well-known large-cap company in my portfolio. Besides that, I hold three small-caps and one mid-cap that are simply too small for most superinvestors or institutions. That’s why they can trade at lower prices despite their quality.
My Portfolio:
5. There are no Investing Styles
Many people start to label their investing style and thus needlessly limit their investing universe.
Growth investors, quality investors, value investors, etc. In the end, there’s only intelligent and unintelligent investing, and this goes back to misconception #1.
“All intelligent Investing is value investing.” -Charlie Munger
However, value investing is not an investing style; it’s a philosophy. The philosophy is to pay less than what an asset is worth. If that worth comes primarily from the quality of the business, the growth opportunities, or something else, is secondary.
It’s all part of the value equation.
As always, thank you for reading the Sunday Episode of the All-in-One Investing Newsletter, and see you in the next episode!
Schedule for Next Week:
Monday: Portfolio Transaction (I’ll buy a new Position)
Wednesday: First Large Cap Research Article of the New Series
Sunday: Next All-in-One Sunday Episode