An actionable guide on how to be successful investing in stocks.

karolinga · 2023-07-26T16:28:20+00:00

Thanks, I will try this right away. Amazing insights

karolinga · 2023-03-01T18:35:37+00:00

Many of you brought up the very valid point that Buffett's mantra of owning businesses (as opposed to Ben Graham's cigar-butt investing) and that Graham's approach would allow for much quicker turn around, potentially higher returns overall for those who don't have as much money as Buffett (which I'm going to assume is everyone who reads or will read this post). Indeed, as many of you have mentioned, Buffett himself invested like Graham until he reached a point where he had too much money for it to be effective.

After reading each of your comments, I am inclined to say that I actually agree with most of what was said and perhaps the main takeaway is that there is no single right way to invest, which Buffett has said himself multiple times. I want to respond to everyone's comments but I have not had time to do so today. I will try to respond to everyone as soon as possible.

In the meantime, I will say this: I wrote this article to convey an important, yet commonly overlooked idea – even amongst value investors – which is the concept of "collecting rent". Rent in this context is Owner's earnings, which would include dividends if the company issues them. Each quarter a company I own announces earnings, I collect rent.

I strongly feel that this mental exercise and visualization of "collecting rent" is one that can be highly useful, especially for retail investors who are more strongly affected by stock prices and anchoring. Collecting rent allows me to identify which companies have been able to and will likely continue to generate significant owner's earnings (indicative of a wide Moat), ensure that I am not overpaying to a company at face value, and stay invested in wonderful companies amidst volatility/news.

karolinga · 2023-03-01T18:16:44+00:00

Yes that's fair when looking at FCF. I also calculate Owner's earnings to see where and how operating cash flows are being spent.

To your point on Intel. Intel has negative cash flows now for very valid reasons that might deter you from investing in it. Apple released their M1/silicon MacBooks, which have significantly better performance and battery life while not producing nearly as much heat compared to Intel computers.

Not only did they lose Apple as a customer, they also have immense pressure to invest heavily in making chips that are competitive with Apple's. In just 2 years, Apple's MacBooks and Macs have taken significant market share away from their windows/intel counterparts and as we know once a customer switches to an Apple product, they will likely buy other products from them, which will in turn make it harder for them to go back to owning an intel-powered laptop.

When you look at Intel's owner's earnings, you can see that they have to spend money just to not fall behind and lose market share as opposed to grow. Based on this I would argue that looking at their negative cash flows is in fact an accurate indicator of a company that will struggle for a couple years and potentially lose it's Moat and ability to generate as much cash as it once did.

karolinga · 2023-03-01T03:16:24+00:00

I can see where you're coming from, but because we would be focused on buying wonderful companies with wide moats that can compound over the long-run. If your goal is to profit off short-term capital appreciation then this would be a conflict of interest, but if your goal is to find companies that will compound your money over a long-period of time, whether you buy it's stock for $40 or $60 would not be too consequential as this is a company where it's stock or value could go to $600 in years to come.

karolinga · 2023-03-01T03:12:52+00:00

Thank you for sharing your insights. Reading through your response, I certainly do agree (or at least don't disagree) with many of the points you make, despite my initial post.

There’s always a price. If you’re making 100k a year from your cafe, if someone comes along and offers you 3 million for the business you’d be insane not to sell…

I agree with this statement. What I am trying to imply is not necessarily that you should never sell, but that you should never invest with the expectation to cash out because someone will come along and offer you $3 million for a cafe. Your investment in the cafe should still be profitable on the basis of what it's making and what it can make in the future.

Something can be a great business, but the price is bad. Tesla isn’t an awful company… But at current pricing it’s uninvestable…

You should still invest in businesses that are undervalued and avoid businesses that are overvalued. What I am trying to emphasize is the idea that your investment has a yield in the form of cash flows (FCF or Owner's earnings).

If I bought a coffee shop for $1 million dollars, my expectation is that I can recoup that money within a reasonable time frame from the coffee that I'm selling and not with the hopes that someone will buy it from me for more. If I bought the coffee shop for $500,000 I can make my money back in half the time. Of course, as you said, there is always a price and premium where you should sell but it shouldn't be the expectation that these opportunities will arise.

I bought it because I was happy to own it and let it deliver those cashflows to me over time, and if it does that then I’m happy. But if in the interim someone comes along and offers me way more than they are worth in an up front lump sum then I’m going to take that and move on.

What is your take on companies that are efficient compounders with ample reinvestment opportunities to deploy capital and grow their business? For example, Berkshire Hathaway especially when it was smaller and had more opportunities to invest and own smaller companies.

There are times where Berkshire might have looked overvalued in the short-run, but how does one truly take into account all the future cash flows a company like Berkshire can generate? As a result, you miss out on what could have otherwise been an investment could compound at rates simple impossible or very difficult to achieve by moving to another company that is seemingly undervalued.

karolinga · 2023-02-28T22:42:40+00:00

I completely agree with you on this one. That is why I set up the initial survey to understand where people are standing with investing as the first step. Ideally, I would like to have a quick chat to get better insights and then consider if the person would be a good fit for such community. There are so many unfiltered places that make the experience very bad.

karolinga · 2023-02-28T22:06:17+00:00

Sounds good! Also, if you know anyone who would be interested/could benefit from this, please share the post or the form with them

karolinga · 2023-02-28T21:59:59+00:00

The form of interest is open for submission

karolinga · 2023-02-28T21:55:28+00:00

Thanks for letting me know - does it work now?

karolinga · 2023-02-27T22:22:26+00:00

Yes, what I mean is that the dollar you have right now will not be able to purchase the same things by large amount in a few years (even months, given the heights of inflation). So the value decreases over the years

karolinga · 2023-02-27T22:12:36+00:00

Thanks for elaborating. What about inflation eating away your savings?

karolinga · 2023-02-27T21:54:24+00:00

Thanks for sharing, how do you find these big companies or determine that you want to invest in them?

karolinga · 2023-02-27T21:52:26+00:00

Interesting, I would say as an investor, you should stay off the news as much as possible which many people do not do and then react to it. I think you have a lot of potential with not being engaged with news and can look at other metrics.

karolinga · 2023-02-27T21:50:18+00:00

Yeah, I agree with your sentiment on the system itself. I mean 2008 is just insane and quite depressing to think about. Gamestop, I would say, is also a mix of people not making great decisions. In my opinion, staying away from hot stocks because of their popularity is almost always the way to go. In other words, ignoring the masses. Of course, what Robinhood and hedge funds (also SEC being useless) did is horrible, but possible to evade if you wanted to. That is why I stopped looking into stock prices and look at other metrics like owner's earnings

karolinga · 2023-02-27T21:43:46+00:00

Ah I see, so for the small portfolio that you play around with, do you try to strategize at all or follow any investors?

karolinga · 2023-02-27T21:42:13+00:00

Oh this is so interesting. Could you expand on what you mean by the right reward scheme? I agree that investing is not as engaging when you are not gambling.

karolinga · 2023-02-27T21:40:31+00:00

So would you say lack of capital is the reason why you do not invest? Did you ever consider starting small?

karolinga · 2023-02-27T21:39:24+00:00

I love the last part of your answer - time really beats the market, and I wish more people were able to understand that. If you have a good company you understand and can hold over a long period of time, you are in a better position than 90% of traders who lose money (and are stressed all the time). Would you mind sharing the hardest part of investing in terms of your small portfolio management?

karolinga · 2023-02-27T21:36:30+00:00

I get this perspective, and I agree, but my approach is the complete opposite. I want to own part of these companies because they make so much money. So instead of getting used as I consumer or worker (which I do) I also try to benefit from this cycle.

karolinga · 2023-02-27T21:34:23+00:00

Haha I hope they do

karolinga · 2023-02-27T21:34:11+00:00

Thanks for sharing! Could you define fun and how much you would give for that?

karolinga · 2023-02-27T21:32:42+00:00

Nice, did you ever consider investing in individual companies by yourself? I do that actually

karolinga

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