Investing style is a religion

[Zaxon]

I read an interesting thread in this forum about averaging down - buying more shares while the share price drops. The exclusive conclusion was that it was a silly idea, and you're throwing good money after bad. Cut your losses short.

But Buffett says it's one of his favourite things to do: buy quality companies when the share price drops. Buy good companies at a bargain price. (Not bad companies of course).

Both of those ideas can't be true, since they're the exact opposite. SELL when the price drops and BUY when the price drops are contradictory.

It seems to me that investment styles: value, moment, growth etc, are really more of a "religion". Religion is believing something you can't possibly know is fact. So value investors believe (but don't know) their set of principles. Momentum investors believe (but don't know) their set of principles, etc.

It's curious to me that after a couple of centuries of investing, we still have to rely so much on belief rather than on hard, actual facts.

 

[captain black]

It's curious to me that after a couple of centuries of investing, we still have to rely so much on belief rather than on hard, actual facts.

If you're using a technical approach to scaling in to a trade then it's easy enough to test the idea with software like Amibroker.

 

[galumay]

Interestingly both ideas you quote can be right. Averaging down works for long term value investors where they are ending up owning a bigger part of the business at a higher discount to value. For a trader who has no interest or understanding in value, and whose horizon is short term, selling out and not averaging down is the correct action.

Its these apparent inefficiences in the markets that create opportunity for both long term investors and short term traders to make money.

In my view the important thing is understanding and articulating what your personal strategy is, and then making sure you conform with it. Its also finding a strategy that is aligned with your world view and personality.

 

[Gringotts Bank]

Only forward tests tell you if there's an edge. Words like 'averaging down' mean NOTHING. It can be highly profitable or it can be a losing strat. Depends what, where, when you buy and how you sell.

To make your edge work, you have to have your mind right. If you don't, you will start trading a strat at the wrong time, stop when it's ready to take off, add discretion to kill profits. The mind is ALWAYS the dominant factor. ALWAYS, no exception. Even if your strat is automated.

 

[luutzu]

I read an interesting thread in this forum about averaging down - buying more shares while the share price drops. The exclusive conclusion was that it was a silly idea, and you're throwing good money after bad. Cut your losses short.

But Buffett says it's one of his favourite things to do: buy quality companies when the share price drops. Buy good companies at a bargain price. (Not bad companies of course).

Both of those ideas can't be true, since they're the exact opposite. SELL when the price drops and BUY when the price drops are contradictory.

It seems to me that investment styles: value, moment, growth etc, are really more of a "religion". Religion is believing something you can't possibly know is fact. So value investors believe (but don't know) their set of principles. Momentum investors believe (but don't know) their set of principles, etc.

It's curious to me that after a couple of centuries of investing, we still have to rely so much on belief rather than on hard, actual facts.

If you have a firm estimate of what the value of a stock/asset is, it makes perfect sense to buy more of it as it gets cheaper.

If you don't care for owning the asset and benefit, or none, from its operations, profit etc.. If you aim to make your money from the buy/sell operations only... then it makes perfect sense to buy into an uptrend and get out when it's down - maybe jump back in as it starts to trend up again.

So the question comes down to whether or not you can "predict" or "value" your stocks.

I personally find it "easier" to value a business than to predict its price movement.

With valuation, you can be somewhat wrong with your entry but since the time frame is flexible - i.e. you can wait until the market see it your way. It's harder to have to sell or buy until the price is right.

 

[luutzu]

Only backtests and forward tests tell you if there's an edge. Words like 'averaging down' mean NOTHING. It can be highly profitable or it can be a losing strat. Depends what, where, when you buy and how you sell.

To make your edge work, you have to have your mind right. If you don't, you will start trading a strat at the wrong time, stop when it's ready to take off, add discretion to kill profits. The mind is ALWAYS the dominant factor. ALWAYS, no exception. Even if your strat is automated.

The Mind or the Wallet?

 

[Gringotts Bank]

The Mind or the Wallet?

what/?

 

[Zaxon]

If you're using a technical approach to scaling in to a trade then it's easy enough to test the idea with software like Amibroker.

You'd have to decide on a timescale. Nobody would recommend buying downward trending stocks if you're only going to hold them for a week, for example. And you'd have to define what a "quality" company is. There's lots of assumptions you'd have to set up first.

 

[luutzu]

what/?

Bad humour, never mind

 

[captain black]

You'd have to decide on a timescale. Nobody would recommend buying downward trending stocks if you're only going to hold them for a week, for example. And you'd have to define what a "quality" company is. There's lots of assumptions you'd have to set up first.

As I said, if you want to approach it from a technical or quantitative perspective then it's easy enough to test on any timeframe.

 

[Zaxon]

Interestingly both ideas you quote can be right. Averaging down works for long term value investors where they are ending up owning a bigger part of the business at a higher discount to value. For a trader who has no interest or understanding in value, and whose horizon is short term, selling out and not averaging down is the correct action.

I think that's a good assessment.

Its these apparent inefficiences in the markets that create opportunity for both long term investors and short term traders to make money.

So this speaks against the Efficient Market Hypothesis. We all benefit from people doing the opposite thing from us to make money.

In my view the important thing is understanding and articulating what your personal strategy is, and then making sure you conform with it. Its also finding a strategy that is aligned with your world view and personality.

I agree. Which supports the statement that investing is a religion: based on your set of beliefs and your worldview at the time, and not so much on immutable truths.

 

[cynic]

I read an interesting thread in this forum about averaging down - buying more shares while the share price drops. The exclusive conclusion was that it was a silly idea, and you're throwing good money after bad. Cut your losses short.

But Buffett says it's one of his favourite things to do: buy quality companies when the share price drops. Buy good companies at a bargain price. (Not bad companies of course).

Both of those ideas can't be true, since they're the exact opposite. SELL when the price drops and BUY when the price drops are contradictory.

It seems to me that investment styles: value, moment, growth etc, are really more of a "religion". Religion is believing something you can't possibly know is fact. So value investors believe (but don't know) their set of principles. Momentum investors believe (but don't know) their set of principles, etc.

It's curious to me that after a couple of centuries of investing, we still have to rely so much on belief rather than on hard, actual facts.

Every human, I have ever met, has expressed belief in many, many things, that they could not rightly, and truly, claim to know as "hard, actual facts". Belief in untrue, or uncertain, things, is not what defines religion.

It so happens that many traders do operate in strict accordance with tenets, pursuant to their chosen trading philosophy, thereby making it a religion.

Are the profits banked to such traders' accounts, more fiction than "hard, actual facts"?

 

[Zaxon]

So the question comes down to whether or not you can "predict" or "value" your stocks.

I personally find it "easier" to value a business than to predict its price movement.

With valuation, you can be somewhat wrong with your entry but since the time frame is flexible - i.e. you can wait until the market see it your way. It's harder to have to sell or buy until the price is right.

I think that's a good summary. If you can select your own timescale, you increase your odds of winning.

 

[Gringotts Bank]

You discard belief as if it's a problem. In medicine there's ample evidence that belief is stronger than almost all drugs, surgeries and other interventions. So the idea that expectation determines reality is quite possible in trading also. If that's how it works, then it's not like you find out what's true then believe it, but instead choose the belief you want, then apply belief to it (ie. there is no objective reality).

 

[cynic]

So this speaks against the Efficient Market Hypothesis. We all benefit from people doing the opposite thing from us to make money.

Not quite. The difference in time frame, creates some separation between longer and shorter term approaches to trading.

 

[luutzu]

I think that's a good summary. If you can select your own timescale, you increase your odds of winning.

I reckon so too.

With all the supercomputers shifting through all the massive amount of data; then there's the brainpower and wink wink nudge nudge going on in high finance, I think it's pretty hard for the average investor to compete in that game.

Better odds if we increase our timeframe... both in the time we're willing to wait for the investment to "work out" as well as in when we'd be interested in buying or selling.

Doesn't mean buy any company thinking that over time it'll grow. But that when a quality business sells for "cheap"... something's wrong with it.

If something is wrong and that wrong won't kill it, it'll still take at least a couple of years to turn the ship around; or see the tide return.

On top of that, when the ship and tide have turned, it'll take another reporting season or two for the numbers to hit the books.

I guess that's quite obvious. But having looked at a couple of companies... the market tend to be backward looking more than they are forward.

Backward in that they look to the reported figurse and project them into the future in a straight line, it seem.

 

[Gringotts Bank]

The world's most "objective" and acclaimed scientists in the field I work in are extremely biased and blinded. They are completely closed off to opposing views, even when those views have far more weight of evidence behind them. No scientist wants to be wrong, especially if they've spent their whole career following a certain path and gaining a reputation and publication in prestigious journals. The hard fact is, most people go from birth to death and change very little in terms of their perspective on anything. We choose somethng (usually early on), decide "I'm a fundamentalist, technical analyst, right/left voter, cathlolic/muslim/navel gazer whatever" then remain that way until the last gasp.

Why the resistance to change? Because the ego is built around identification and beliefs, so if we go changing things it creates enormous instability. Most people don't tolerate that instability because what that leads to is "well... if I was lefty fundamentalist and now I'm right wing technician.... who am I really?". And that's a question people will go to any length to avoid. It's much safer to say "this is me" and never question anything.

 

[galumay]

Which supports the statement that investing is a religion

I think religion is a poor choice of word, religion is specifically the belief in things for which there is no evidence at all. Faith means belief without evidence. Investment strategies at least have a basis in reality! Its more a reflection of the reality that there are few absolutes in life, and so there are multiple approaches that can have positive outcomes.

So this speaks against the Efficient Market Hypothesis.

Again, its not an absolute, markets are partially efficient, part of the tme. But the 'hard' version of the EMH has been completely discredited these days.

 

[Value Collector]

I read an interesting thread in this forum about averaging down - buying more shares while the share price drops. The exclusive conclusion was that it was a silly idea, and you're throwing good money after bad. Cut your losses short.

But Buffett says it's one of his favourite things to do: buy quality companies when the share price drops. Buy good companies at a bargain price. (Not bad companies of course).

Both of those ideas can't be true, since they're the exact opposite. SELL when the price drops and BUY when the price drops are contradictory.

.

I think it comes down to your skills.

If you have the skill to identify a good business, and you see it dropping in value, then it makes good sense to buy more.

If you don't know what your doing, and you are buying into a terrible businesses that is over priced, you will not do well.

It seems to me that investment styles: value, moment, growth etc, are really more of a "religion".

Value and growth are not actually separate things.

we still have to rely so much on belief rather than on hard, actual facts

As investors we are making "estimates" and "assumptions" about the future, but these can be based on facts, but of course there things change and they probably can't be nailed down to hard facts.

I guess what is comes down to is strategy.

Value Investing is about making an estimate about the future output of something, and deciding if the current market price for that thing is justified by that out put.

So you would be using facts to come to that estimate, although it will always just be an estimate.

Momentum etc are different things, it can come down to time frames

 

[Zaxon]

It so happens that many traders do operate in strict accordance with tenets, pursuant to their chosen trading philosophy, thereby making it a religion.

Are the profits banked to such traders' accounts, more fiction than "hard, actual facts"?

Someone's success story is an anecdote. Whether if you tried to emulate their exact method you'd end up with the same success yourself, is hard to say. There's often a lot of luck and fortuitous timing involved.