Monday 10 March 2014

Change made to my investing and divesting rules

An investment principle that leads to prosperity

In the rules that I made for Investing & Divesting I had a very final rule that said that if I could not beat DAX in 3 years then I had to shuffle 50% of my net worth into a low cost index fund, after 6 years 75% and after 9 years of failure all of my net worth should be pushed into an index fund.

This rule was made very early on in my investment "career" and was based on me trying to protect my net worth from too many years of losses. It would force me to step into a system that is well known that it works, meaning the low cost index funds, which every person should consider to invest in to have a guaranteed healthy return of the investment when made for a longer period of time. In this reflection you can read a bit more about other hidden benefits of index funds.

Lately I have been re-reading books, I have listened to Peter Lynch, I have listen to Walter Schloss and several other well known and less known investors and many of them claim that the best years for their investments have started around year 4 when they have bought cheap companies. These guys have been around for so long and knows so much more than me that it must be true and I must take their word for it which means that I decided to re-adjust my final rule and to increase the years that I give myself to beat DAX so:

If I have not managed to beat DAX in 5 years then 50% must go into low cost index fund, after 10 years 75% of my net worth must be there and after 15 years I will go all in on the low cost index fund.

What is your experience? How many years has it taken your investment to give a healthy return?



poomk said...

Many colleagues of mine start to profit from their investment (comparing to an index, of course) on their 3rd-4th year of investment.

One of the reasons I found is that people tend to be overly optimistic on their very first years. Which later led them to certain losses.

I too had this experience when I started. On the very first years I invested based on ratios, quantitative factors, which was very similar to Graham-style investment (mainly because I copied his idea).

Later, I found out that this method is not my cup of tea. I tend to prefer, and also do better, in investing on 'great' businesses. The determination of what a great business is, is both quantitative and qualitative.

I would like to quote from Warren Buffett Partnership's Letter in 1967:

"The evaluation of securities and businesses for investment purposes has always involved a mixture of qualitative and quantitative factors. At the one extreme, the analyst exclusively oriented to qualitative factors would say, “Buy the right company (with the right prospects, inherent industry conditions, management, etc..) and the price will take care of itself.” On the other hand, the quantitative spokesman would say, “Buy at the right price and the company (and stock) will take care of itself.” As is so often the pleasant result in the securities world, money can be made with either approach. And, of course, any analyst combines the two to some extent – his classification in either school would depend on the relative weight he assigns to the various factors and not to his consideration of one group of factors to the exclusion of the other group."

more on

This kind of idea, that Buffett found out since 1967, stuck in my head. These kind of stocks, unlike the deep-value stocks as before, are what I am investing on. And since then my investment has been improved.

Perhaps, the qualitative factors that Buffett mentioned, can explain the performance of your portfolio, especially Münchener Rück, ABF, and Asian Bamboo..

I recommend Buffett's letters. And Lynch's books are pretty good too, all of them.

Good luck on your investment!

Fredrik von Oberhausen said...

Thanks for your great comment poomk!

I start to see more and more the simplicity in making investments in great companies that are trading at a fair price and maybe one day I will do like you did and change to that kind of investment principle instead.

One thing is for certain and that is that one will sleep much better at night owning great companies and especially if there is a major market crash because one knows that the giants will make it to the other side.

I keep thinking and I try to keep improving. I am sure that the direction of the journey that I started back in 2012 will change many times until the end is reached.