Tutorial 41-45 Recap
1) CHANGE - The Investment Masters understand that nothing is permanent. Businesses change and markets change. Technology is changing businesses at a rapid pace. It's important to recognise change and react to change. At the same time an investor must change his view or position if the circumstances change. Be open to new information and be open minded about change and your response to it.
2) CORRELATION - The Investment Masters recognise the dangers of excessive correlation. Correlation is used to measure how one stock moves in relation to another. Remember that correlations are based on historic data and are not constant. Investors should seek to build portfolios with uncorrelated assets to help protect capital. In weak markets, there is a tendency for all assets to move together. Be mindful of the correlations in your portfolio which requires a lot of thought. What are the factors that could do serious damage to your portfolio. It may be that you have all or too many of your assets exposed to one currency, industry, sovereign risk, investing style, interest rates, commodity, etc. As circumstances change risks change so continually assess the correlation risks in the portfolio.
3) INVESTING INSTINCT - The Investment Masters understand the power of intuition and instinct. The longer you spend analysing companies and industries and investing the larger the subconscious library of information you build. It's often the connection of this subconscious information that provides investing insights. Over time pattern recognition improves significantly to help the investment process.
4) EFFICIENT MARKETS - the Investment Masters understand markets are not perfectly efficient. At times stock prices move far more than the underlying values of the businesses they represent as prices are driven by human emotions. There are no investors in the ranks of the Investment Masters who have used the Capital Asset Pricing Model and the theory of Efficient Markets as the basis of their investing style.
5) SHORTS - Those of the Investment Masters who utilise shorting in their investment tool kit recognise the additional risks involved. There are a multitude of factors that must be considered when implementing a short strategy. Factors such as crowding, stock borrow, risk of corporate activity, risk of short squeeze, risk of management over-promotion, timing, sizing versus longs etc. Shorting stocks on the basis that they are expensive is a quick way to the poor house.