Simple but not easy (The Financial Athlete #25)

It took a lot of practice for me to learn how to punch the Wing Chun (Kung Fu) way. There is no muscle tension or brute force in a Wing Chun punch. Muscles are relaxed and you use your whole body into the punch. In biomechanics, this is called a kinetic chain. The movement is simple, but not easy to learn. As my instructor would often remind his students, “Wing Chun is simple, not easy. There’s a difference.”

Successful investing is also simple but not easy. The simplicity of investing is best summed up in the common refrain, “Buy low, sell high.” In practice, the investing herd does the opposite. Fear drives them to sell when prices are low and greed drives them to buy when prices are high. It takes a contrarian investor to buy low and sell high. Even so, contrarian investing does not guarantee success. For example, those who buy stocks simply because they are trading at a 52-week low don’t fare much better. What’s to stop the stock price from declining much further? Many of those stocks have declined in price due to poor company performance. Only when an asset sells for less than 20% of its intrinsic value does it become a bargain. So then the secret to sound investing is comparing prices to a good estimate of intrinsic value. For widely traded stocks, which are highly covered by analysts, I refer to morningstar.com for their estimate of intrinsic value and then decide whether I agree with their assessment. For smaller cap stocks and real estate, I estimate intrinsic value myself. It takes a lot of study and practice to get good at estimating intrinsic value.

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