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Welcome to The Investment Selector
July 3, 2017
Welcome to The Investment Selector! The purpose of this website and newsletter is to help individuals grow their hard-earned money by finding investments with the best possible odds of producing strong gains. The goal is to generate actionable, specific recommendations that you can implement, with the intent on providing you strong long-term results with comparatively little risk. Decades ago, investors had an incredibly difficult time finding information and sources with which to make reliably profitable investment decisions. Books and publications were relatively scarce. Receiving financial reports and investment research reports via regular mail consumed time and paper. Figuring out what pieces of information or factors were the most important ones to focus on was an arcane art bordering on guesswork. There was no electronic database or computers that were easily accessible to the individual investor.
Now however it is the total opposite, investors face a mountain of information. There are countless books, websites, blogs and newsletters that will tell you where and how you should invest your money. There are numerous places online where financial reporting data can be found, such as the Securities & Exchange Commission’s EDGAR database for American company information, and SEDAR for Canadian companies. Moreover, other services have those data collected and summarized. And myriad other services purport to give recommendations on where to invest, with contradictory strategies and claims. Instead of too few data, we’re now faced with way too much information and the investor today is not much more enlightened as to what to do.
Then as now, faced with all those difficulties, the most practical choice for an investor would be to put their money in a mutual fund or an account and trust the managers’ skill in choosing top-notch investments. However, depending on the source, anywhere from 70 to 90 % of mutual funds fail to equal the returns of broad investment markets. Even before fees are taken into account, an active fund is more likely to fall behind a broad market index then it is to be ahead. This also applies to any active approach or service used by an investor, whether it be a private investment vehicle, newsletters, or investing individually directly by oneself. There are several explanations that have been put forward to explain why investors, even professionals, fail to replicate simple benchmarks. These fall into two broad categories of explanations. One is that markets are efficient, that the markets very quickly assimilate any information about any investment to then adjust their price accordingly. This might stem from there being so many investors, laymen and professional, that new information gets absorbed almost instantaneously and the markets are rational. Anyone who outperforms the market is likely more lucky than skilled. The second set of arguments as to why the markets are so hard difficult to beat is behavioral. As humans, we have a number of emotions and cognitive biases that tend to get in our way when it comes to investing. One of the most important ones is overconfidence. Some others include self-serving bias, conservatism, etc. Unlike the efficient market hypothesis that asserts that humans are rational, the field of behavioral finance argues that we are irrational, sometimes predictably so. I very much lean towards behavioral explanations of the reason why so many people, including experts (or perhaps more so for them), underperform the market. Regardless of the reason, the unavoidable fact is that active investing, whether it be through picking stocks on your own or using active funds, is likely to get you less money than choosing to invest with the market. Simply invest in a broad index fund and chances are you’ll do better than the majority of investors.
Having said that, index funds are not a panacea. Firstly, you have to take what the market gives you, good and bad. Generations of investors were scarred by the crash of technology stocks in the early 2000’s and then by the financial crisis of 2008. Secondly, for every investor that loses in a trade, there must be a winner, and a lot of winning investors ascribe follow the philosophy of value investing. The discipline of value investing is straight forward in theory: estimate the true or intrinsic value of an investment and buy when it is well below that value. Of course, very few investors would admit to purposely buying securities above their true value. What distinguishes value investors from others is their conservatism. They don’t get excited over a hot, glamourous stock with little, if any, profits and only bright promises. Rather they seek a margin of safety in a bargain price compared to an investment’s fundamentals and are indifferent to brilliant prospects. The typical and academically-defined value stock has a low price in relation to such measures as book value, earnings, cash flows, etc. But value can also be found in quality businesses generating high returns on their assets and selling at moderate prices. Whether it’s the proverbial “fair company at a wonderful price” or the somewhat rarer “wonderful company at a fair price”, value investments have tended to outperform the markets over the long haul.
The purpose of this newsletter is to simplify your own research by providing you with value investment ideas. My approach is very systematic and disciplined. The majority of my recommendations will be of either the bargain-priced, deep value stock variety or the high-quality growing business with a moderate valuation. Therefore, you’ll get ideas spanning both major subsets of value investing. I’ve read and carefully studied several legendary investors, such as Walter Schloss and Warren Buffett. I’ve thought very carefully and tested extensively different systems, what companies make successful investments and arrived at carefully calibrated screens to identify and trade attractive stocks. Not every one of my picks will be winners, far from it. There’s no guarantee that what worked in the past will work in the future. If you’re not confident in any approach, including mine, you’re likely better off to invest in passive funds. However, if you want better chances at achieving good long-term investment results while keeping risk to a minimum, you should take at least a look towards a fund or investment service that follows the value investing philosophy of Benjamin Graham, Warren Buffett, and other investing legends. I believe my system is a good application of this philosophy. I can’t promise results and you should be wary of anyone who does. I do promise the following: my recommendations will follow a rigourous, systematic value approach and my own liquid investment portfolio will consist almost entirely of my own picks. If you’re interested in more details on my recommendations and model portfolios that can generate returns like the ones below, contact me via email at Konrad.email@example.com .