How to evaluate an investment?

[lillo9546]

we can say that investments differ due to many factors. For example, I could make an investment of time and effort to cut down a tree, or an investment of money to pay someone to do it for me. There are things, such as goals, that we set for ourselves in life, for example such as having children, buying a car mainly to travel with the family, taking part in a cooking class, hiking on a mountain, going to the gym , study a certain subject, start a small business, go out with friends, etc.

Clearly all these things have factors in common in our society, for example if you want to do most activities, they require an investment of money and time, but there are also many other very important factors such as increasing self-esteem, staying in company, being alone, gaining experience, and much more.

So if you have a choice, i.e. an investment, what are the guidelines to adopt for its evaluation?
Do you have a mental framework that could be adapted to all things in life?

[2Birds1Stone]

I̶ ̶t̶y̶p̶i̶c̶a̶l̶l̶y̶ ̶s̶t̶a̶r̶t̶ ̶a̶ ̶t̶h̶r̶e̶a̶d̶ ̶o̶n̶ ̶t̶h̶e̶ ̶E̶R̶E̶ ̶f̶o̶r̶u̶m̶s̶ ̶a̶s̶k̶i̶n̶g̶ ̶f̶o̶r̶ ̶p̶e̶o̶p̶l̶e̶s̶ ̶o̶p̶i̶n̶i̶o̶n̶s̶ ̶a̶n̶d̶ ̶t̶h̶e̶n̶ ̶g̶o̶ ̶o̶f̶f̶ ̶o̶f̶ ̶t̶h̶o̶s̶e̶.̶ ̶

Not every decision or choice in your life is an investment, if you ask 10 people for their opinion on such a general idea you will get 11 answers.

[jacob]

It's useful to distinguish between value and price. Value is subjective (how do you like it?). Price is objective and intersubjective (how does everybody like it relative to something else?). Much of the fields of economics and finance are about (Adam Smith style) price formation. I suggest reading https://www.amazon.com/Man-Economy-Stat ... 933550279/ first.

Using this information can be done in the concrete (derp), abstract (typical consumer/FIRE), or systemic level (ERE WOG).

[PhoneticNachos]

I have always liked the quote from Rumsfeld:
"...there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns—the ones we don't know we don't know..." - Donald Rumsfeld

Or the quote from Sagan:
"“Absence of Evidence is not Evidence of Absence”" - Carl Sagan

https://hbr.org/2012/05/discover-what-you-need-to-know

https://www.amazon.com/Think-Again-P.../dp/1984878107

https://en.wikipedia.org/wiki/I_know...I_know_nothing

This is also explained by the concept that few people have heard of, called the Dunning-Kruger effect:
The Dunning-Kruger Effect is a cognitive bias where people tend to assess their intelligence or abilities as greater than they are. https://en.wikipedia.org/wiki/Dunnin...3Kruger_effect

Buffett and Munger/Li Lu/Howard Marks/Mohnish Pabrai etc., all great fund managers, they all understand the same thing: That to be successful at buying and assessing individual stocks, you have to have independent analysis.

People like me who are NDT have a unique advantage because our inherent brain synapses and neural network is wired in a way that is most likely unique to them, in comparison to neuro-typical people, who have predictable pathways and thoughts.

Understanding the "wisdom of the crowds" is one of the most important keys to finding opportunities within investments. But be forewarned, for to be forewarned is to be forearmed. That you have to be able to understand when the masses are right, or just trend following, as well as when they are wrong. Then you must break from the herd.

This is where "Mr. Market" comes into play which is the basis of the teachings of Benjamin Graham.

And within this thought process which was elucidated from another perspective, as explained by Jesse Livermore; the behavior of the underlying prices, and how they can diverge from the expected conclusion.

This is evinced within the popular phrase attributed to John Maynard Keynes – “Markets can remain irrational longer than you can remain solvent”.

You have to have rules for investing, an understanding of what you are buying, why you want to make the purchase, when you would sell. You must have a plan. If you fail to plan, you plan to fail.

[chenda]

''Stuff happens''

[lillo9546]

People like me who are NDT have a unique advantage because our inherent brain synapses and neural network is wired in a way that is most likely unique to them, in comparison to neuro-typical people, who have predictable pathways and thoughts.

what do you mean?

[PhoneticNachos]

what do you mean?

Neurodivergent thinkers, who comprise roughly 15% of the US population.

Couple that with being an INTJ, which is only like 2.1% of the US population.

Along with having a high IQ (disclaimer: but all this really shows is that I am good at taking those type of logic/ critical thinking test), which is around 2% of the population, for the 130 genius threshold, not that it really matters.

So there is maybe as low as 2k to as high as 20k people in the US population out of 331.9 million people, that share a close approximation of those traits at the same time.

imagine how cool it would be if people like that all got together outside of reddit lol

https://blog.lime.link/visualizing-crowd-sizes/

[fiby41]

Along with having a high IQ (disclaimer: but all this really shows is that I am good at taking those type of logic/ critical thinking test), which is around 2% of the population, for the 130 genius threshold, not that it really matters.

Since you've mentioned Munger, he has also said:

1. It is better to have someone (investor/manager?) who has an IQ of 120 and thinks it is 110 than to have one who has an IQ of 120 and thinks it is 130

2. In the investment business, if you have an IQ of 180 you should keep the 120 and sell the rest. The ability to do advanced calculus is not really required. So here we have a bunch of extremely talanted people... [going into describing the details of Long Term Capital Management meltdown.]

---
@lilo: You could have ranks of preferences and shuffle them around when a preference reaches the point of diminishing returns. I personally can engage in only 3-4 activities in a day meaningfully.

Example: I come home from a job and could hustle for earning some more by working on a business after that but I may not see any results for 6 to 9 months from now. So I consider I have maxed my earnings for the day and move on to the next preference. I could exercise or catch up with a friend, but not both at the same time, but the friend is in town only for another week, so he moves up the rank. After catching up with the friend for a few hours and we are on the same page, there is nothing more to be discussed by staying longer or meeting the next day again, so next preference takes its place. There are only so many hours in the day and one falls asleap 'studying a certain subject.'

[PhoneticNachos]

Exactly why I disregard the test.
Not sure why you are trying to passive aggressive name/shame but ydy ofc.
If you do any research on me you will see my posts on forex forums as to that one specific results and my ROI, let alone all the other fields I have in my favor as aggregate sources of income.

[DutchGirl]

Exactly why I disregard the test.
Not sure why you are trying to passive aggressive name/shame but ydy ofc.
If you do any research on me you will see my posts on forex forums as to that one specific results and my ROI, let alone all the other fields I have in my favor as aggregate sources of income.

You seem to think fiby41 was attacking? And going further, you seem to think they were attacking you personally? I do not read either of that from their comment. Perhaps you shouldn't either, because no attack (on you) was intended?

To get back to the discussion, most people turn out to not have the right talents and character traits to at all times be a successful active investor. This has been proven by research time and again. Now there are some people who have this unique blend of talents and who also get a bit lucky who do beat the average, but for most people it is best for their financial future if they assume that they are not going to be the exception to the rule. This would mean staying away from daytrading and active investing, and instead to invest in low-fee diversified index funds. And then they can use their blend of talents and character traits and time to be successful in the rest of their lives, so that they can funnel money they earned towards their life goals. For most people that would be the best strategy.

[fiby41]

Sorry PhoneticNachos, that was not my intention. It maybe the limitation of the written medium why it came out that way. Also there is availability heuristic/frequency bias on my part. I've been overdosing on the same personalities you mentioned due to being made a window sitter at work. So I ratted off the first things that came to mind related to what you said.

Jacob had mentioned The Dhandho Investor in a blog post years ago but I got around to reading it only in May of this year. Using the Kelly Criterion for portfolio allocation and identifying business situations/asymmetric bets with limited downside and potentially high upside were the key takeaways. If I'd have read it when Jacob mentioned it, perhaps the probability discussion would have been too much for me. Even now the concentrated value investing approach is too much for me. He has only three US stocks in his portfolio according to statutory filing and before that also he had only three which he sold all of. I'm thankful for him sharing so many recordings of his talks on his channel. Its great if you want to get the philosophy down but it gets repetitive quite quickly as the audience changes. Audience interactions are delightful to listen to but sometimes they ask so detailed questions that the context is lost on me.

The memos of Howard Marks to investors of his hedge fund are available online. I've only read the Uncertainity one and binge watched his interviews with some podcasters. They are quite verbose (the memos) but they do deal with the intricacies of the philosophy behind and psychology of investing.

Ten years ago was when I first saw Snowball selling in Crossword (local bookstore chain.) It was hardbound and expensive (about 2.5% of my total savings then) so I looked for a paper back but didn't find it then. I think Damn Right! comes from Munger's quote 'Am I securely rich? Damn right! I am.' I am not saying everything he says should be taken as gospel truth. I've objected to some of his statements in Poor Charlie's Almanac on this forum. But that doesn't mean we can't learn from his although we might disagree with his. Buffett partnership letters and the annual reports later are freely available on the BRK website. Under-promise, over-deliver, setting realistic expectations, the 'ground rules', are the takeaways. Not mentioned anywhere here but by inverting: having a 'poison pill' so that you are not taken over as a company. BRK having 4-5 grooves and not losing sight of the forest for the trees. Mention of there being only a dozen decisions that have contributed disproportionately to most of the companies fortune. He doesn't mention which but Pabrai infers- finder's fee to Goldberg for bring Ajit (million then and a million every year although the finder doesn't work anymore), AmEx (about 60% of the portfolio in a single stock when it AmEx had insured there was oil in barrels which turned out to be seawater), KO around the time when New Coke was introduced (New Coke > Pepsi > Coke-a-cola in blind taste tests conducted by both competitors.) etc.

How despite deals that prima facia have gone wrong, they come out unscathed with a profit. Eg. Dempster Mills employees raised half a million to buy out Buffett Partnership's stake to prevent turning the one-big-company-town of Beatrice, Nebraska into a ghost town, Diversified Retailing ('retail is a tough business'), 12% of Salomon with warrants to by 12% more (then Salomon tried to corner the treasury bond market by bidding for more than the allowed maximum of 35% using client's accounts without their knowledge and other related-parties), etc.

Being a better investor makes one a better businessman, and being a better businessman makes one a better investor. So many lessons but all this is like reading financial fiction. Companies in India, even those public listed are family-owned with multi-generations of its members making up the promoters (allowed upto 75%.) So it is unlikely I'll be taking over any.

[PhoneticNachos]

OK, I understand, we all can overreact at times lol. As humans we all need to be mindful of more of the things that bring us together and not separate us.
I think I came across as a little aggressive too.

I am personally very excited about my starting investment in a cool BNPL company called Sezzle (SEZL). I only throw in $250 as an initial investment and then add in increments of $250 every three months or so.