What are your Investment Rules?

[DTC]

“Seems likely that the drop in asset values of crypto's & shares has shredded a lot more money than inflation lately?”
Kiora… You are suggesting that the amount of investors’ money that goes into a company's share price as the price rises from $4 a share to $10 a share is not necessarily the equivalent amount of money that is taken out by dis-investors when the shares are sold off and the price drops to $4 each again?

And for the absolute money supply reduction question I asked earlier, I will post the question on the NZX bear thread now that it's reduced in toxicity and someone has mentioned it there.

[kiora]

Worth sharing again
"Strong hands or weak hands
By Colin Twiggs
June 27, 2022

“Nowadays people know the price of everything and the value of nothing.”

~ Oscar Wilde

Strong hands are long-term investors, including most institutional investors, who focus on intrinsic value and are insensitive to price.

Weak hands and leveraged investors are highly sensitive to price. They follow the news cycle in an often unsuccessful attempt to to time purchases and sales according to short-term, often random, fluctuations in price.

Weak hands respond emotionally to price movements -- making it difficult to be objective in their decisions to buy or sell -- while strong hands focus on dividends and other measures of long-term value.

Strong hands recognize that the biggest obstacle to sound investing is their own emotional response to rising or falling prices. Weak hands submit to the psychological pressure, make frequent buy and sell decisions, and find it difficult to be objective. Strong hands detach themselves as far as possible from the price cycle and the emotional pressures that accompany it.

At the peak of the investment cycle, weak hands pay way above fair value for stocks, while strong hands resist the urge to buy when price exceeds their own objective view of long-term fair value.

Fair Value
As confidence decays and prices fall, weak hands are shaken out of their positions. Margin calls force some to liquidate while others sell through through fear -- failing to recognize that anxiety is the primary cause of falling prices. Some try to hold on to their positions but eventually succumb to the pressure. The mental anguish of watching their stocks fall often drives them to sell at way below fair value -- just to end the pain.

Strong hands are patient, independent of the herd, and unmoved by the wild emotional swings of bull and bear markets. They wait for stock prices to fall to below fair value, when opportunity is at its maximum. Stocks that are gradually recovering from a steep sell-off and scarce retail buyers are signs that a bottom has been reached.

Recency bias
One of the key benefits of years of investing, through several stock market cycles, is the ability to recognize the familiar signs of euphoria in a bull market and despondency in a bear market. When it seems that the bull market will never end, that is normally a sign that risk is elevated. Conversely, opportunity is at its maximum when an air of despair and despondency descends on the investing public.

Don't confuse price with value
Price seldom equates to value.

Short-term investors confuse price with value, making them vulnerable to wild price swings which can weaken the resolve of even the most hardened investors.

Long-term investors hold the majority of their investments through several investment cycles, pruning only those stocks where long-term revenue growth or profit margins have been permanently affected and are unlikely to recover.

Supply and demand
Many readers are familiar with supply and demand curves from basic economics. For those who are not, here's a quick refresher:

The supply curve, represented by the red line on the chart below, represents the quantity available for sale (bottom axis) at any given price (left axis). The higher the price, the greater the supply.
The demand curve, represented by the blue line on the chart below, represents the quantity that buyers are willing to purchase (bottom axis) at any given price (left axis). The lower the price, the greater the demand1.
Price is determined by the intersection of the two curves, maximizing the value achieved -- at quantity sold (Q1) and price (P1) -- giving value of Q1*P1.
Supply & Demand
Bear markets
In a bear market, the supply curve moves to the right as weak hands are influenced by falling prices and a negative media cycle. Note that the bottom end of the curve shifts a lot more than the top -- strong hands are relatively unmoved by market sentiment.

Price falls steeply, from P1 to P2, as weak hands increase the quantity available for sale. Volume sold increases from Q1 to Q2.

Bear Market
We need to be careful not to equate the price at P1 or P2 with value. They may reflect the marginal price at which you can acquire new stock (or sell existing holdings) but they do not reflect the price at which strong hands are prepared to sell. That is why takeover offers are normally priced at a substantial premium to the current traded stock price. If you had to increase the quantity that you want to purchase to Q3, you would have to move up the supply curve, to the right, and price increases to P3 in order to attract more sellers2.

Market capitalization, likewise, is simply the number of shares in issue multiplied by the current traded stock price and is not a reflection of the intrinsic value of a company.

Conclusion
Investors need to have a clear idea of their investment time frame and adjust their approach accordingly.

One of the worst possible mistakes is indecision. If undecided, you are likely to be caught between two stools, buying late in an up-trend and selling late in a down-trend.

If you are a weak hand, it is far better to recognize that. Resist buying near the top of the cycle; apply sound money management -- position-sizing is vital if you are focused on price; sell early, at the first signs of a bear market; and never, ever trade against the trend.

If you are a strong hand, never confuse price with value. Focus on dividends and other long-term measures of value; stay detached from the herd; and have the patience to wait for opportunity -- when prices are trading at way below fair value.

Notes
Discussion of inelastic supply curves and negative-sloping demand curves is beyond the scope of this article.
P3 will shift to P3* in a bear market.
Acknowledgements
Hat tip to RBC Wealth Management for the investment cycle chart to which we added fair value.

The original article was published for Patient Investor subscribers on June 26, 2022.

Quote for the Week
“The stock market remains an exceptionally efficient mechanism for the transfer of wealth from the impatient to the patient.”

~ Warren Buffett "

[kiora]

That's a maybe this OR that?
"The Bear Market Story and What Next in Six Charts"
https://www.sharecafe.com.au/2022/06...in-six-charts/

[kiora]

Not to do lessons in hindsight
" it’s easy to see how Tiger Global got into its current predicament.
“They’ve just been winning, and winning, and winning,” he says. “I think one thing that happens to people who win, win, win, win, is they get overconfident, and they can’t imagine a scenario where they’re not winning.”
"As the Tiger 40 stocks have tanked, the hedge funds that own them have gotten margin calls asking for more cash or collateral for their loans and redemption notices from investors wanting their money back. That in turn created more selling, which created even more selling, and so on. The same feedback loops that were operative on the way up are working in reverse on the way down."
https://mcusercontent.com/ea8e8120d9...ubbleverse.pdf

[kiora]

If you are a trader someone could be monitoring you
"The law required financial service providers to report all overseas transactions worth more than $1000 to Police and the Reserve Bank"
https://www.nzherald.co.nz/business/...VXNLEKROON5ZI/

[DTC]

Put it this way: if the money supply increases by 40% (over 2 years), then we should expect the price of shares to increase by a similar amount(?)

https://www.investmentwatchblog.com/...se-in-history/

https://www.longtermtrends.net/m2-mo...-vs-inflation/

[kiora]

Put it this way: if the money supply increases by 40% (over 2 years), then we should expect the price of shares to increase by a similar amount(?)

https://www.investmentwatchblog.com/...se-in-history/

https://www.longtermtrends.net/m2-mo...-vs-inflation/

Not only shares. What about that extra money "invested" in bonds & Crypto

[kiora]

"SEVEN GUILTS IN TRADING PSYCHOLOGY"
https://www.tradingview.com/chart/VN...y+167+%28EN%29

[DTC]

Not only shares. What about that extra money "invested" in bonds & Crypto

Yes. A proportion of the increasing money supply is going into goods & services, property, commodities and art, and so on, through the economy, so basically every price is inflated... where else can it go?

[kiora]

"Charlie Munger Not Worried About Inflation, Economy"
"He owns radically different businesses, which is a Berkshire-type thing. He’s got just three big businesses in 12 years. Berkshire’s top 40 deals in its whole history amount for most of our achievement. Life is a game where you work very hard and deal only occasionally.

It’s very hard to acquire unrelated companies, earn a higher return on capital and pay market prices for them. Most people who try and do that, fail. And the only reason that Berkshire and Stonehouse succeed is that we don’t do it very often, and we’re pretty careful.

“We’re simply looking for great businesses to acquire,” Jennings added. “We want business owners to know there is a good, credible, long-term buyer available to them.”"
https://finance.yahoo.com/m/6916d911...t-worried.html
https://www.stonehousecorp.com/