Happiness, Miserable and Surprise
“The first rule of a happy life is low expectations. If you have expectations that are too high you will have a miserable life. When you have reverses you need to just cope and not stew yourself into unnecessary misery.”
-Charlie Munger - 2020 Daily Journal AGM Q&A session
Other than a happy life, stock market is also a game of expectation leading to happiness, surprises or misery.
Some people expect the price to go up and feel miserable when it goes down.
Some people expect the business to have high moat and feel bad when their analysis is wrong
Some people expect the business to do better this quarter and feel disappointed when the quarter is just “normal” .
Expectation also dictates the price movement.
High expectation often equate to higher price also dictates that when expectation become too high, the company share price is bound to disappoint.
Sometimes fundamentals do eventually catch up with the high expectation which lead to justified higher expectation.
At the same time, falling share price do sometimes catch up with even lower expectation leading to possibly a bargain purchase. .
Low Expectation (Happiness):
Low expectation investing is mostly what we practice.
We fully expect the share price to drop when we purchase it. This is not the usual dictum of the shares falling and it becomes cheaper allowing one to buy more of it.
Instead prices continue to fall as there is a “low expectation” from the investment community i.e. a negative momentum. The share price had been treading lower for months, years. Without any reason to do otherwise, it will trade lower into oblivion.
But the continued low expectation could possibly set up a price where margin of safety start to occur with free optionality (such as positive management action and activist investors) not price in.
If nothing happens, the business and share price can go into permanent decline as evidence by the value trap scenario*.
The habit of digesting all news and announcements will allow one to spot the “variant perception” - an improvement in the business despite the investment community continuing to mark down the share price.
Special situation is the key here. If there is no special situation in place, then all undervaluation could be seen as a value trap*.
This is the Special Situation investing as we define it
- Low expectation Low Price sets you up for a happy life.
High Expectation (Miserable):
As for the growth, most people, newspapers or magazines got that right. It is hard to miss the start of the automobile age, the computer age, the internet age, cloud computing and possibly the biotech age starting with mRNA.
The problem now is that the expectation is too high and often the valuation implies a
continued growth far into the future (10 years or more)
conversion which seems hardly realistic as human are slow to changes (swapping horses for cars or paper with computers)
Unless it is a pandemic, where demand was being pulled forward and old habits and processes got swap out within a short period of time, the valuation usually could not be justified.
The recent re-evaluation of the many high tech companies are the effect of this where improvement in operational data created an even higher expectation bringing about an even higher price.
Growth is bound to slow and these high expectation could affect the share price soon.
This is the growth investing which we avoid.
-High Expectation and High Price are recipe for miserable life.
Reasonable Expectation (Surprise):
Sometimes after long period of high expectation, the share price started to move down resulting into a reasonable form of expectation.
We could effectively buy a growth company at a reasonable price. You could see this as Growth at Reasonable Price (GARP). The growth is the key here. The company is growing at a pace which do not excite the market but there is some key optionality here.
The company has a
superior culture making it a monster which could tackle different industries
superior CEO who has a track record to make things work
superior industry dynamics which allows for substantial share buyback
Growth had resume or will resume soon and the narrative would shift allowing the company to be valued at much higher prices.
This is Unrecognised Growth as we define it
- Reasonable expectation, Reasonable price set you up for surprises in your life.
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Assumption: Share price and intrinsic
*Value Trap below