3 Lessons On Investing, As Taught By Confucius
If you’re expecting some “Know your enemy and know yourself and you can fight a hundred battles without disaster” kind of existential advice, then we’re sorry to disappoint. However, our dear friend Confucious (yeah, we have coffee some times) has left us with plenty of other nuggets of wisdom, and The Motley Fool shares you can apply these to your investing journey:
Confucius was a philosopher, politician, and educator in ancient China. His influence on East Asian civilisation is so great that even after 2,500 years since his passing, his teachings can still be felt today in the cultures of countries such as Japan, Korea, and China.
But, much of Confucius’ legacy lies in his lessons on ethics and governance so why is he appearing on an investing website like The Motley Fool Singapore? Turns out, there are sage words from Confucius even for investors. Here’s some I’ve picked.
“Everything has beauty, but not everyone sees it”
In investing, we tend to have a predetermined bias on any company or topic we’re studying even before we’ve done any analysis on it. This saying teaches us to take a step back from our biases and try to look for the good in companies, especially when the market can only see the negative side of things.
If we are one of the few that manage to see legitimate strengths in unloved companies, we might be well rewarded over time. Commodities trader Olam International Ltd (SGX: O32) would be a good example of this. It was attacked by a short-seller in late 2012; shares of the company promptly sank from around $2.00 in October 2012 to a low of around S$1.40 in December.
But for investors who were able to find the good in Olam, they’d be well rewarded now with its shares up almost 75% from its December 2012 low to S$2.45 currently.
“He who learns but does not think, is lost. He who thinks but does not learn is in great danger”
Investing entails constant learning. In addition, remembering history is also extremely important. Understanding how past bubbles and crises were formed and resolved will allow us to better prepare ourselves against similar episodes; financial history, after all, has a knack for rhyming. For investors who do not learn from the past, there is a huge risk that they might fall into the same few investing traps over and over again.
“He that would perfect his work must first sharpen his tools”
Lastly, investing is a lifelong pursuit. There is no secret formula to investing. Great investors are constantly learning and upgrading their toolbox. Confucius teaches us to be humble when investing and to be ready to sharpen our tools all the time, no matter how good we feel we already are.
Billionaire investor Warren Buffett is a great example of an investor who’s constantly on the look-out to sharpen his investing toolkit. He started his career as an investor in cheap unloved companies, or what he terms as cigar butts. During that phase of his career which lasted from 1957 to 1969, Buffett produced tremendous results with annualised returns of 29.5%.
But, that didn’t stop him from searching for even better ways to invest. In 1989, he explained:
“If you buy a stock at a sufficiently low price, there will usually be some hiccup in the fortunes of the business that gives you a chance to unload at a decent profit, even though the long-term performance of the business may be terrible. I call this the “cigar butt” approach to investing. A cigar butt found on the street that has only one puff left in it may not offer much of a smoke, but the “bargain purchase” will make that puff all profit.
Unless you are a liquidator, that kind of approach to buying businesses is foolish. First, the original “bargain” price probably will not turn out to be such a steal after all. In a difficult business, no sooner is one problem solved than another surfaces – never is there just one cockroach in the kitchen. Second, any initial advantage you secure will be quickly eroded by the low return that the business earns. For example, if you buy a business for $8 million that can be sold or liquidated for $10 million and promptly take either course, you can realize a high return. But the investment will disappoint if the business is sold for $10 million in ten years and in the interim has annually earned and distributed only a few percent on cost. Time is the friend of the wonderful business, the enemy of the mediocre.”
Now, Buffett’s famous for investing in great companies with powerful economic moats, a far cry from his earlier disposition toward cigar butts.
Overconfidence is a deathly characteristic to have in the stock market. No matter how smart you think you are, there will always be something new to learn.
It is amazing how wise words from millennia ago are still relevant today. Investing can be an extremely fruitful journey. If you look hard enough, there are things to learn about investing from even the most unexpected of places. Confucius can probably attest to that.
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