The Double Entendre of Investing
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Bruce Greenwald is one of the most prominent thinkers and educators in the world of investing, and is renowned for his influential books like Value Investing: From Graham to Buffett and Beyond and Competition Demystified.
His investing journey began in the 1950s when he studied under Benjamin Graham at Columbia. In a full-circle moment, he later took over and taught Graham’s value investing class for many years.
Greenwald’s classes were incredibly popular, often filled beyond capacity, partly due to recommendations from Warren Buffett himself. Despite his impressive academic credentials, Greenwald likes to explain the essence of investing in these straightforward, easy-to-understand terms:
“Whenever you buy a stock, thinking it’s going to do well, somebody else is selling it, thinking it’s going to do badly, and one of you is always wrong.”
This double entendre of investing is something we often overlook. For instance, when I decide to buy another share of Visa (V), which I consider the gold standard of stocks, I do so because I believe it's a great long-term investment.
I see a company with growing sales and profits, unmatched margins, and negligible debt. Visa is a free cash flow printing machine, and their growth runway into the future doesn’t show any signs of slowing down as people continue to seek more efficient payment methods.
Whoever is on the other side of the coin likely sees all these same qualities but still determines that the company isn't worth holding onto. Of course, there are many reasons why someone might sell a stock unrelated to the company's performance—maybe they need the cash to pay bills or something—but bearishness about the company’s future is certainly a common reason for selling.
Nonetheless, the fact that two people can look at the same company and have completely opposite opinions about it underscores two crucial points.
First, each of us views the world through different lenses shaped by our unique experiences. These experiences form our version of reality, and influence our beliefs, biases, and decisions.
For all I know, the person who sold me their shares of Visa could have had a negative experience with their customer service, or maybe they bought a Visa gift card that didn’t work, which became their catalyst for selling.
The point is, you can never know what’s happening on the other end. The only information you have is your own research and analysis, which leads me to the second reminder: you can’t borrow conviction.
Greenwald also said, “The key to successful investing is to understand why you are going to be the one who’s on the right side of the trade,” and you have to develop this understanding for yourself.
If our experiences shape our decisions, then the decisions you make in your portfolio must stem from your own experiences (AKA your own research and analysis - I have a crash course on how to research stocks here).
Still, as Greenwald pointed out, one of you is always wrong in this double entendre of investing, and there will be times where that’s going to be you. Nevertheless, throughout your investing journey, the aim is to be right more often than not.
With that said, I want to hear from you: When was the last time you were wrong about an investment? Reply to this email, or write to me here and let me know.
And a big thank you to all of the readers who responded to last week's newsletter! You can read some of the responses down below in the "Hot Takes" section. 👇
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SINCE YOU ASKED 💬
"Do you only add to positions that are down? Or do you DCA into all stocks?"
- @MichaelMartin-lv6fs | YouTube
I don't exclusively add to positions that are down, but I would say the majority of my contributions do go to positions where I can average down.
For example, over the past couple of months, I've been focusing my investments on Starbucks and Johnson & Johnson, both of which are showing unrealized losses. I'm excited to buy these stocks while they're down because it allows me to purchase them at a lower price and reduce my average cost per share, which strengthens my overall position in these holdings.
However, I don't limit myself to adding only to positions that are down. I've frequently added to stocks where I'm already up, and I've also dollar-cost averaged into positions regardless of the price.
A great example of this is Visa. I added to Visa every single week for multiple months irrespective of the share price because I was determined to build up that position. In fact, once I'm done adding to Starbucks and Johnson & Johnson, I'd like to get back to buying Visa.
Ultimately, the decision boils down to figuring out the most effective use of your capital. If you believe you own great companies and those companies are cheaper than when you first bought them, adding to them while they're down presents a fantastic opportunity.
With that said, there are plenty of worthwhile opportunities out there, and you don't necessarily have to be in the red to take advantage of them.
Have a question? Ask me here to see it featured in an upcoming newsletter.
HOT TAKES 🔥
Last week, I asked readers about which stocks are in their "investable universe." Here are some of the responses:
Matt said: The stocks I definitely have in my “investable universe” are EPD, ABT, UNH, MA, JNJ, ODFL, SO, and my favorite ADP.
Aaron said: Some companies that would make my Investable Universe would be TGT, WM, V, and UNH. Really would love to start a position in all of them in the future. Recently, I just added LOW to my portfolio with their recent pullback.
Pat said: The Dividend Universe looks like commodities, pharma, index funds, Coca-Cola (KO), and Hershey (HSY). These I understand. Even Walmart (WMT) is not a pure consumer defensive play anymore.
