TELSA MOTORS RECEIVES GRANT

The most obvious example is diversification. Making a series of bets on separate high-probability events is an excellent idea. Diversifying across several different asset classes and hundreds of securities is something entirely different. Even if there are hundreds or thousands of excellent investment opportunities, it does not follow that an investor ought to make every reasonable bet. After all, some will appear to be more reasonable than others. There is no sense in taking on several difficult tasks in the hopes of achieving a result that can be produced by taking on a few very easy tasks.

You don’t have to agree with me on all these issues – most people don’t. But, it is vital that you question the unstated assumptions upon which an investment operation is based. You might come to the same conclusion as those who engage in wide diversification. But, you need to come to that conclusion on your own.

Many investors have not even bothered to consider the underlying premise of diversification. They aren’t really sure why diversification is a desirable strategy. They don’t know how it minimizes risk or at what point the benefit from adding an additional position becomes immaterial. Diversification may be a prudent strategy. But, you can only decide that for yourself after you’ve considered the benefits in terms of risk reduction and the detriments in terms of selectivity reduction.

If I were forced to spend my life betting on horse races, I’m quite certain I would bet on very few races. Whenever I did bet on a race, I’d bet on several different horses.

Why? Because I know more about people than I do about horses. The likelihood that a few horses in a few races get too much favorable attention seems much greater than the likelihood that I could ever make reasonably specific judgments as to which horse is most likely to win a given race. Of course, I would do best if I didn’t bet on any horse races at all.

• So, the question is whether stocks are anything like horses. I don’t think they are. When it comes to businesses, I’m a lot more comfortable with the idea of picking the few winners from the many losers – especially when the odds get out of whack. The one tactic that would remain the same is inaction. Acting less and thinking more is sound advice wherever money or commitment is concerned.
• A successful investor has to have confidence in his judgments. I don’t know how you can gain that confidence without subjecting your beliefs to honest scrutiny. An unexamined philosophy will never exorcise your deepest doubts – and for as long as these doubts remain, you will be unable to find the confidence you seek.
• Most people’s beliefs about investing are very tenuous. There are, of course, people who are very passionate about investing. They don’t view investing as some esoteric subject, but rather as a field intimately connected to the human behavior they observe in their everyday lives.
• For everyone else, however, beliefs about investing come in the form of passive knowledge. The tendency is simply to accumulate an inventory of conventional dictums. Investing beliefs are formed much the way a student prepares for a test. If the subject of investing were as simple as a third grade spelling bee, this wouldn’t be a problem.

But, investing is a far more complex subject. That isn’t to say it is necessarily a difficult subject. For some, it is relatively easy. But, it is never simple. An investor can not analyze relationships with the certitude and precision a physicist can. The investor is concerned with human phenomena, which are necessarily complex phenomena.

• The complexity of the subject is what makes it appear so difficult. While you can develop a set of guiding principles, it is impossible to devise rules that will lead you to the best course of action in each and every case.

If you try to build an intellectual edifice based on principles such as high returns on equity, strong consumer franchises, low price-to-earnings ratios, low enterprise value-to-EBIT ratios, high free cash flow margins, and rock solid balance sheets – you will fail.