investment wisdom - Aberdeen Asset Management

Consider thedifferencebetween priceand valueBe humble,the stockmarketis smarterthan youIn the real world, the distinction between priceand value is frequently apparent. Given the choicebetween a $10,000 car and a $10,000 tee shirt,it’s pretty clear that the car is better value. Inthe investing world however, it is much harderto discern the difference. Unlike a car, whoseeconomic utility is something we can understandand even evaluate, the value of a company issomewhat intangible and thus a tricky concept tograsp. Guru stock picker Philip Fisher noted that thestock market is filled with individuals who know theprice of everything, but the value of nothing. 2Overconfidence might help to secure a jobpromotion or the attention of others at a nightclub,but in the investing world, an over-inflated opinionof yourself can be disastrous. You may think thatyou are in a position to predict the direction ofthe market or a particular stock over the next fewmonths but remember that there are millions ofothers doing the same thing. Apply a little humilityand ask yourself honestly whether you are reallysmarter than all of them. As the father of moderneconomics and successful investor John MaynardKeynes noted, “Successful investing is anticipatingthe anticipations of others.” 3Avoid thingsyou do notunderstandAnd finally…The world is an increasingly complex place andone often finds oneself blinded by science orconfused by complicated arguments. Withinvesting, it is important to understand preciselywhat you are buying, at least so that you cansleep soundly at night. Think about shares asyou would a book: if you don’t understand it,put it down. Peter Lynch recommended that ifyou cannot summarise in just a few sentenceswhy you’re investing in a company, then you’reprobably looking at too much information. 4If you place bets proportional to their market oddson every horse in a race, you’ll come out slightlydown, after the track’s take. This is a pointlessstrategy, particularly if you know more than othersabout horses. It is important to understand whereyou have an edge and, when you have one, to useit to your full advantage. We never forget Buffett’stip, “Wide diversification is only required wheninvestors do not understand what they are doing.” 51Warren Buffett, Chairman’s letter (2004) to shareholders2Philip A. Fisher, Common Stocks and Uncommon Profits (1958)3Isms (2006) by Gregory Bergman4Morgan Housel, Keep It Simple, Fool (2008)5James Altucher, Trade Like Warren Buffett (2005)