February 20, 2021

What is actually a proper investment?

Recently, a friend of mine reached out to me and asked me if I would use Fibonacci numbers when analyzing investments. As I answered him that Fibonacci as well as every other technical analysis tool may have their relevance for traders and speculators but should not be mistaken with fundamental analysis for proper investments, he asked me to define "a proper investment" for him. As this - especially in times of booming stock market - is a very interesting topic, I decided to publish an article about it.

What is an investment for me?

Every intelligent investment has one characteristic: Buying some future expected cashflows or assets for less than they are intrinsically worth. The actual ownership of an asset - be it a property, a company, or just a tiny share in a company - is what makes a transaction into an investment.  It is not for nothing that Warren Buffett once said: "If you don't want to own a stock for 10 years, you shouldn't own it for 10 minutes!" All other approaches, whether momentum trading, charting, or even the simple tracking of broad markets via index funds and ETFs, on the other hand, are not approaches to investment for me. At their core, these concepts are actually a bet that there will be someone later who will buy my financial investment back from me at a higher price. This is not to say that these approaches are worse or less suitable. On the contrary, I am convinced that for the majority of retail investors, a savings plan in a simple, globally diversified equity index fund is an excellent idea. It is the easiest way to participate in the development of the global economy. But it is not a fundamental investment strategy.

Why is this particularly important right now?

Being aware of what you are doing in the markets is always crucial. But in times of liquidity glut of central banks, games stonks, and constantly new SPACs, it is even more important to remember how you want to act. Many newcomers to the financial market have been able to earn a lot of money very easily in recent years and months. However, only the first real setback will show them whether they are up to their own strategy. AndrĂ© Kostolany used to divide stock market investors into two groups: The hard-nosed and the shaky. I cannot answer definitively whether more shares are held by hard-nosed or shaky investors. What I can do, however, is to adjust my strategy so that I never become a shaky investor myself. 

My "PE-like" approach to public equities

Over the years, I have developed a "private equity"-like approach. This means that I only buy shares in companies if I would also buy the whole company. And I always ask myself whether I would also buy the share if I could only enter into the investment in an off-market transaction - and therefore could also not sell it again at any time. If an idea doesn't pass this hurdle, it can never become a serious investment for me. In my opinion, the constant monitoring of real-time prices is actually rather counterproductive. It is not only a waste of time but also leads to short-circuit reactions. For me, the stock exchange is just a marketplace. I only visit it when I intend to buy or sell something. It's a great tool for that - but you have to be careful not to get caught up in the constant offers and the sentiments that come with them. The common sense saying "Only go to the mall if you really intend to buy something" can be easily transferred to the stock exchange. I try to pay attention to the stock exchange only when a prime asset is offered there at a reduced price. And otherwise, I prefer to spend my time discovering these first-class assets.

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