Beyond Growth vs. Value: The Key to Smart Investing

  Bernard Paton’s “Logic Around Us” is a book I read more than ten years ago, and it is still fresh in my memory. Professor Bernard Patton tells us that clear thinking is rare but important, allowing us to discover “truth.” Take investment as an example. As investors and employees of Enron, don’t you know that you knew the inside story before the company went bankrupt? In this case, “truth” can come in handy. Knowing the facts related to Enron will sell Enron’s stock and avoid falling into a dangerous situation.
Investing is a complex subject

  In the world of investing, simple answers often don’t exist because simple questions almost don’t exist. Most of the important issues we face are complex. So don’t unthinkingly accept any simple answer, especially a simple answer to a complex question. In recent years, investors have learned this lesson the hard way: any method of making money in the stock market that is easily spread by word of mouth and used by many people is often too simple to be sustainable. Baruch Spinoza’s conclusion at the end of Ethics that “all perfection is not only rare but also difficult to obtain” applies not only to philosophy but also to Wall Street. It follows from this that complex questions are difficult to answer.
  Generalizing a “knowledge” like “smart investing” is tentative because it is based on generalizations from experience. In principle, the next experience is likely to be something we don’t expect. Real probability knowledge is based on reality and must be repeatedly tested and confirmed by real observations, so no general knowledge is absolute. Uncertainty arises from the method used to generate generalized knowledge and therefore cannot be overcome. Once a generalization is proven false, many similar examples usually follow. Once a rule is proven wrong, we often discover dozens of other exceptions as if we are seeing the light of day again. And as long as an exception is found, it can be overturned. This exception may be a black swan, so the generalization that “swans are all white” is self-defeating.
  By extension, once the issue of false accounting comes to the surface, many other issues will also be exposed. After some of Enron’s false accounting problems were exposed, many other false accounting problems also emerged one after another, not only at Enron but also at many other companies. Investors will be more alert to problems, or read relevant data such as cash flow statements more carefully. A small discovery of a small piece of truth often leads to a great discovery of a big truth or even many truths.
  How to prove that the law of diversification is true or false? We already know that it is easy to make mistakes when explaining complex topics with simple ideas, so we can use logical deduction to apply this generalization to this specific situation. Since investing is a complex subject, the simple advice to “diversify” is wrong because it oversimplifies a complex issue and is unlikely to apply to all situations and all investors.
  The point is not to diversify or concentrate investments, but to make the right investment at the right time. Concentration or diversification of investments has no correlation with profits. In view of this, we should focus on studying individual investments and observing what is reasonable and desirable, rather than focusing on diversified or concentrated investments. If we do diversify our investments, we should not assume that our investments will be safe; on the other hand, we should not assume that we will make a profit by concentrating our investments.
  Concentration or diversification has little to do with profitability. Both strategies fail to achieve their true purpose, as the key to investing success is actually complex and mostly related to having the right thing at the right time. The concept of diversification cannot work at all times and in all situations. If it works, investing will become extremely simple, and anyone who diversifies their investments will profit, and in less than a few months, they can own the world. Therefore, most investment advice is bullshit. As an overgeneralization, the idea of ​​diversification takes us out of touch with reality and leads to error; as a simplification, it hides truth and prevents us from taking correct action.
Overgeneralization is not advisable

  When facing a problem, it is a wrong thinking to think that you can only choose one of two possible answers or that there is only one reason. The reason lies in the error of overgeneralization. Stephen Gould, in “The Miscalculation of Man,” calls this error “dichotomy,” referring to our tendency to interpret complex and continuous realities in dichotomies. This error is called “black-and-white thinking” because it oversimplifies complex situations, causing us to ignore their complexity and diminishing our ability to think of alternative solutions.
  In the theory of biological evolution, from an organism back to its ancestors, no matter how different it is from its ancestors, this difference must go through countless tiny steps and processes, in a continuous and smooth way. realized in a way. This is the theory of gradualism. Catastrophists have discovered in the fossils of mammoths and mastodons that there have been sudden changes in the geographical environment and the subsequent mass extinction of life on the earth. Since environmental changes can be sudden, and therefore changes in biological characteristics, it seems that the evolutionary process should indeed be fast, jumpy, and ruptured. Since then, the debate between gradient and mutation has never stopped.
  However, by the mid-to-late 20th century, the conflict between gradualism and catastrophe theory was resolved by two new theories. The first theory is punctuated equilibrium theory. They believe that the rate of biological evolution is not constant, but may be faster or slower. Most of the time, organisms only undergo very small, continuous, and smooth changes, forming a so-called equilibrium state; their characteristics only undergo rapid, jumpy, and fracture-like changes in certain short time windows. . The second theory is the neutral theory. They believe that although the variation in genetic sequences at the microscopic level is random, the effects at different locations are very different. Harmful mutations are quickly eliminated, leaving a large number of neutral mutations interspersed with a very small amount of beneficial mutations. This pattern of variation is manifested in the macroscopic characteristics of organisms, showing a state of punctuated equilibrium, that is, a long and boring equilibrium state, interspersed with extremely short-term rapid changes.
  In the world of investing, the most famous dichotomy is growth versus value. So-called value investing buys stocks that are relatively cheap in terms of their earnings and potential; so-called growth investing targets stocks that are expected to grow quickly and have higher valuations. Drawing a clear line between growth investing and value investing is unhelpful and a bit contrived. It is also a limiting thing and obviously does not help investment returns.
  Investment should originally invest in valuable companies. A valueless company is not worth investing in, so the phrase “value investment” is redundant. The equivalent of value investing is growth investing. Value investing favors dividends, while growth investing favors growth. Only growth has value. Without growth, there is no value. Growth is implicit in value. Therefore, what we have to do is to identify growth-oriented enterprises, and this growth must be based on the creation of value.

  Charlie Munger never gets involved in the debate between value and growth. In his view, all smart investments are value investments. This puts the final word on the debate between value and growth. Charlie Munger pointed out that the growth investing philosophy has nothing to do with paying a high price-to-earnings multiple or a price-to-book multiple, because you have made your decision wisely and the good prospects are so certain that you still get more than you paid. More value, even in so-called growth stocks that you buy at 35 times earnings. If that makes sense, it’s because you’re getting more value than you paid, but it’s still value investing.
  It can be seen that there are many ways to solve complex problems, not just one or two. The inference of either white or black is wrong. Black-and-white reasoning fails to consider all possible ways to resolve a situation or problem.
Thinking clearly is often beneficial in the long run

  The future is contingent, not determined. This is also a theme of randomness and uncertainty in complexity science. However, when something can be predicted accurately, it is often because the prediction or the thing being predicted does not have much to do with human interests. What is relevant are human problems, such as the uncertain existence of human beings. For example, what will the stock index be on a certain day in the future? Which company’s stock would be a better investment target? But such things are often impossible to know with certainty. After all, the future has not yet arrived, and the only thing that can be determined is today. So, beware of any absolute predictions of future events, as predictions will always be wrong.
  The causal connection of events is often due to chance. What we often do is to explain what has happened rather than to completely predict what will happen. A year before Enron’s bankruptcy, company management inflated profits by nearly $1 billion. In addition, the company’s executives began to use inside information to manipulate stock price transactions, allowing themselves and their friends to make steady profits, while the other 64,000 uninformed stock investors had to pay the price.
  It was impossible for investors to know all the details before Enron collapsed, but they could sniff out the clues through analysis. In 1999, someone asked Bernard Patton whether he should invest in Enron. His answer was that since he didn’t understand Enron’s business, he shouldn’t invest in it. If one could intelligently analyze what Enron executives said, one would not have invested in Enron either. If you know that their conflicts of interest and their words and deeds are inconsistent, then you should not invest in Enron.
  To discover a conflict of interest, one must analyze the inconsistency between words and deeds. Disagreement between words and deeds most often occurs when there is a conflict of interest. Any discrepancy between words and deeds can be evidence of fraud, hypocrisy, dishonesty or stupidity. We can learn a lot from trying to use evidence of inconsistency between words and deeds to evaluate the character of others. Once you make a personality analysis, you can predict possible future troubles and then act according to the predicted results.
  Because reality exists, we must deal with real things from a realistic perspective. And truth refers to things that actually exist, not things that don’t exist. Most real-life problems are not as simple as fuel or food. Thinking clearly may cause trouble in the short term, but thinking clearly is often beneficial in the long term. Laziness, blind obedience, and an unwillingness to accept anything new or different are habits that not only hinder progress but also stifle thinking. Thinking clearly can tell us better than any tool what is likely to be true and what is likely to be false.

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