The vain search for perfection

In 1995 sports psychologist Dr. Bob Rotella wrote the book "Golf is Not a Game of Perfect". Every golfer knows how important the mental attitude on the course is - the mindset. Only the swing we make counts. Here and now. Not the swing we just missed or the difficult seventh hole that lies ahead. Focus is important.

But golf is not a game of perfection. It is played by people. And people make mistakes. Not every mistake can be avoided. Not everything is under our control. But there is one thing we can control: How we react to mistakes.

The “market game” is quite similar. In reference to Dr. Rotella's book one could say "Investing is Not a Game of Perfect". No matter how much we plan and study, life will find ways to surprise us. Unfortunately not always in a positive sense.

But this does not excuse a sloppy approach. Only those who are well prepared can win in this extremely competitive game. The third president of the United States, Thomas Jefferson, is credited with the following quote:

“I am a great believer in luck, and I find the harder I work, the more I have of it.”

Unlike golf, the game on the exchanges is like a three-dimensional board game. A game in which the rules, the playing field and the opponents are constantly changing. Otherwise, we could all go to the “Investment University”, graduate and win money on the stock exchange at will until the end of our days.

The courage to contradict

Good investing is a contradictory mixture of unwavering principles - no matter how much the game changes - and eternal learning and adaptation. Stable principles are important because there is no consistency in investment performance. Every strategy has its good and bad times. Without exception! Only with firm convictions can you get through the bad ones.

For example, I am a great advocate of fundamental stock analysis. The world may change and new business models may emerge. But one unalterable principle is:

The value of a company is the sum of all future net cash flows over the life of the company, discounted at an appropriate interest rate.

In the case of a bond, this idea is mathematically founded. In this field, all future coupons are discounted with the prevailing interest rate to determine the value of the bond. Any deviations from this would quickly disappear again through arbitrage. In the case of a stock, the future "coupons" are unknown and the market price is derived from the differing expectations of market participants. There are no possibilities for arbitrage between the "intrinsic value" of the company and the traded share price.

Even so, long-term investors can benefit from a drifting apart of these two variables. If the analysis was correct and the intrinsic value (also called fair value) was far above the current traded price, they will eventually converge. This extra return is the reward for a proper and good stock analysis. It is a fulfilling life-task to keep perfecting this analysis. At least for me.

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