What's the best way to make investment decisions?

(Alex Sherwood) #1

This discussion got started with these comments -

(Alex Suss) #2

Car companies are always in a tough business, you want businesses that generate a lot of money with little capital employed. Businesses like Facebook etc. Then you need to take on very little debt and you print money.

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Add shares from other markets such as DAX
#3

Haha I love your thinking here. A lot to learn from you I see. I guess I am trying to have a Buffet approach and invest in things that I really understand. Believe me cars here were only an example. I agree with @alex.s that there are really interesting things out there worth exploring. I am not saying to put all your investment in there but its always fun to have some ‘side-projects’.

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(Emma (#20 😎)) #4

I think what people want to invest in is down to their own choice and opinion really. Many people wouldn’t touch Facebook with a barge pole

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(Alex Suss) #5

Hmmm fair enough, Facebook dominates social media with Facebook, Instagram and Whatsapp. Any competition, they can just buy out essentially. The have one of the cleanest balance sheets in the tech industry and are single handily putting WPP out of business.

They will continue to grow and their stock in a few years will be at $300, a 10 bagger for people who invested at the IPO.

(Alex Suss) #6

Yeah you need to stick with what you know, every industry has multiple companies. You need to identify the industries that will thrive, (fintech, AI etc) and the companies in them that will thrive.

I’ve just had a bad experience with car makers in general. It’s ok if you want to collect dividend checks, but the high capital employed means they are always prone to suffering with debt issues in recessions. Elon Musk is learning that with Tesla, he may be a visionary, but he has no clue on operations and that is why Tesla as a company is not investable. This is why I’d rather invest in Apple with Tim Cook running the show, as he knows how the manage costs and the supply chain.

(Emma (#20 😎)) #7

And ethically they’re seen as a bit dodgy at the moment.

People new to investing get interested in companies they know and like, like Tesla. They don’t want to spend time looking at balance sheets and going over financials for their first investments. Plenty of time to do that as they learn. Having things available that they know is an important first step, no matter what market it’s available on.

(Alex Suss) #8

I will let you in on a little secret, if you buy something with little regard to financials and at any price, with little regard to margin of safety. You will lose your shirt. The market does not care and will punish you. I mean you could be looking at losing half your money over a period of few months.

I personally would not touch Tesla with a barge pole, it is not profitable, it’s burning through money like it grows on trees and the car industry is very competitive. Tesla needs an operations guy who understands how to run a car company.

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#9

Lets all agree that having more shares and markets available on freetrade can help us all to invest in more things that are innovative, exciting, promising, ethically ok and everything else. :wink:

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(Alex Sherwood) #10

To be fair, Tesla’s executive team is made up of some very experienced people e.g.

they’re also trying to do a very hard thing, which makes their business particularly high risk & potentially high reward. We’ve discussed this some more here - Does Tesla have a sustainable competitive advantage (yet)?.

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#11

I am counting on their MARS PROJECT ! GO ELON !

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(Emma (#20 😎)) #12

Hardly a secret. And a bit patronising

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(Alex Suss) #13

Do you invest without looking at financials? Just interested.

(Alex Sherwood) #14

I think it’s probably fair to say that most people make investment decisions based on signals. There’s a huge range of totally valid signals that an investor can take into consideration when making a decision, besides a company’s financials. For example:

  • How much engagement does a company’s advertising campaigns receive on social media?
  • How good is the management team?
  • How strong is the country that the company sells it’s products / services in’s economy?
  • Is the company ethical & therefore, will it avoid some of the potential harm that comes from acting unethically?
  • How big is the potential market?
  • Does the company have a strong brand?
  • etc etc

Of course a company’s financials are often very important & I’d recommend studying them as much as possible before investing in a company, in many instances. If you can translate them then they can give you incredibly valuable insights into a company’s performance. But at the same time, they’re far from a perfect source of information when it comes to making investment decisions. One of their limitations, if you’re investing based on what you believe company’s potential is, is that financials can only tell you so much because they’re backward looking.

There’s a risk of getting caught up in a dogmatic approach to investing which relies on a small set of signals which may not be the most useful, when evaluating certain companies. So I try to keep an open mind & focus on learning about as many different signals as possible, in order to try to improve my own investment performance. I’m always keen to hear someone’s answer to “what else do you look at, besides a company’s financials, when you invest?”.

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#15

Lots of people get paid a hell of a lot of money to spend all their working hours looking into business financials to invest in, and still often underperform the average. Looking at financials, whatever that actually means in reality, isn’t a magic bullet and there isn’t a magic formula for which figures matter.

Even if you find the magic formula, how do you price in the possibility of the likes of BP losing 51% of value after the oil spill in the Gulf of Mexico, VW’s emissions scandal losing 38%, Lehman Brothers going bankrupt with billions in assets?

HSBC in February rated Royal Mail a buy with a target price of £3, Deutsche Bank are saying sell with a target price of £1.80. They’ve got access to the same financials, both full of intelligent people dedicated to researching this stuff. How can they be so different?

So you can talk about and do analysis until the cows come home, but in your words, the market will still punish you and take your shirt either way.

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(David Kent) #16

Personally I am a fundamental investor, I don’t use technical signals and I take a longer term approach.

It comes down to what kind of a return or upside do I hope to see in 10 years and could my money do more else where?

I try to remove the emotions wherever possible and stay focused on the forecasts and predictions. Still doesn’t stop you getting blindsided!

As @john points out people get paid a lot of money to figure this stuff out and it’s still a dark art.

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(Alex Suss) #17

I understand what you are saying, but I rarely lose money in my investments. The reason being…

a) I read financials and buy good companies
b) I buy within a MASSIVE margin of safety

I bought BP at 361p a long time ago, if you buy cheap enough, you can’t lose money. If you ignore the margin of safety, then yes, 50% falls are the norm.

The most important thing is buying a quality business, the second most important thing is having a margin of safety in what you pay. Ignore the later and Mr Market will take more than your shirt. The higher the P/E a company has, the greater the Margin of Safety you need to employ in your dealings.

(Ryan) #18

Trying to take the emotion out of investing is the best way to make investments. Many people see something go up and buy because of FOMO, or see something go down and panic sell.

As others have said above, look at the company’s fundamentals - do you understand what it does? Will the product it makes/sells still be around in 5-10+ years? Are the management subject to scandals or are they invested in the company, so there pay packet depends on the performance of the firm?

Regardless, there will always be stuff that you can’t control or predict!

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(Alex Suss) #19

Be fearful when others are greedy, be greedy when others are fearful.

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#20

Have you noticed how they have not told us how to decide who the others are :see_no_evil: :sweat_smile: