About 2 months ago, a friend asked me why I invest in the share market – since according to him the share market is all about “luck”.
I disputed him on the spot and gave him a lecture on why share market investing has nothing to do with luck, but to do with skills in picking out the best shares to invest in. I should know, since I’ve been (unabashedly) steadily generating returns of approximately 15-20% per annum on my portfolio.
Then I went home and thought about it. On second thoughts, my friend is not wrong, but the term he used should not have been luck, but probability.
Yes, the share markets are all about probability, but not the same kind of probability as strolling into the Casino and betting on the roulette. Get this right: the most profitable investors know the share market is about probability, and that the key to winning the game, is simply to skew the probability of winning onto your plate and making full use of this.
Value Investors are really the best at playing this probability game and this is how to invest in shares – we skew the odds of winning to our extreme advantage:
1. Seeing the big picture
Most people are concerned with day to day fluctuations in share market prices. Elation when the market turns up by a few points is quick replaced by a gloomy mood when the market turns bearish. This causes most investors to exit and sell out at the wrong times, converting paper losses to real losses.
Value Investors have long since figured out that regardless of share tips and how well informed you are with regard to macro economy, day to day fluctuations are largely unpredictable.
By turning to the big picture and having a longer time horizon, stock profitability becomes much more predictable.
If you look at the long term chart of the Dow Jones Index – you will notice that despite the small baseline variability, the chart moves upwards in a general direction:
It becomes much more predictable because good and genuine businesses are only built to go one direction – that is to grow upwards in the big picture.
2. Margin of Safety
Value Investors have also learnt the best way to game the probability of winning is to ensure that we have a tolerable of margin of safety before entering into any company’s shares. Even if an unexpected event occurs in the business, there’s a cushion to fall back on. We simply exit an underperforming share with minimal pain.
3. Only investing in good businesses in a portfolio
By only investing in fundamentally good businesses through clear portfolio sizing, the Value investor’s odds of winning are greatly increased. Tempting as it may be, never put all of your eggs into one basket. The simple act of creating and allocating funds through a portfolio of good businesses
will spread out your risks and make profitability a statistical probability in your favour.
To learn more on how to invest in shares with probability of winning to your advantage, click on the link below to register your seat: