Thread by @dollarsanddata

1| Tweetstorm on the most important (and difficult) investment rule to follow.

To start, a question for you to ponder:

What is the most important piece of information when it comes to buying a stock?

2| Do you think it is management? Growth prospects? Profitability?

No, no, and no.

The most important piece of information when buying a stock (or any asset) is — the price you pay.

3| That’s right. Even with bad management, terrible growth, and bad profitability, there exists some price, possibly a negative price (I pay you), at which every asset would be a good investment.

All the other aspects of an investment will fail you if you pay the wrong price.

4| Skeptical? Consider Warren Buffett’s first ever television interview where he stated:


“If you buy things far below what they are worth, and you buy a group of them, you basically don’t lose money.”

5| Or how about the Google talk given by @MebFaber where he demonstrated that a higher initial valuation is generally predictive of lower future real returns:

6| Meb goes on to show how this works across every market they examined geographically and throughout history.

It is the investment rule that holds across all space and time: BUY CHEAP ASSETS

This is known as value investing and it has worked well historically.

7| Are you still skeptical? Consider Dan Rasmussen’s (@verdadcap) article illustrating how purchase price is the most important determinant of future returns in private equity:


americanaffairsjournal.org/2018/02/privat…

8| Or how about what one of the greatest investors in history, Seth Klarman, wrote in his magnum opus “Margin of Safety” (hint: buy things below what they are worth):


amzn.to/2MbA30N

9| Maybe I should tell you about the dinner between @BrentBeshore and Warren Buffett where Warren said one of the most brilliant, yet simple, things I have ever heard about investing:


“Price is my due diligence.”

How much clearer could he be?

10| I ran the numbers myself and found the same thing. Starting valuation is generally predictive of future dollar returns for U.S. stocks since 1881:

11| Should I keep going?

Should I keep burying you in evidence?

I won’t, but I will answer the question that is still on your mind:

“If this rule is so important, why don’t we all do it then?”

12| Because buying cheap is the most difficult investment rule you could ever follow.

Why?


How do you KNOW when something is cheap?

How do you KNOW when you are getting a deal?

In public markets, you generally don’t. It is very, very hard.

13| As the joke goes:



“What do you call a market that is down 90%?

That’s a market that was down 80% and then went down 50% more.”

Even when you think something is cheap, remember the words of Joe Grundfest, Stanford Law professor, “Eggs can always go lower.”

14| Think about it. Investing is the only good where everyone runs out of the store when prices fall.

You don’t do that with food, clothing, or anything else, but many of you will sell when things look grim for stocks. Historically, these are usually the best times to buy.

15| So what should you do given how hard it is to “buy cheap?”


1) Consider a small value allocation in your portfolio, or
2) Ignore value altogether and just keep buying. Dollar cost average your way to success. It’s easy and simple.

16| Remember, investing is more about avoiding big mistakes than generating the highest return possible. You are playing a behavior game, not a mathematics game.


With that being said, happy investing from Of Dollars And Data and thank you for reading!