Businessman Investor

Touching base with the rational business psyche of stock market investors

Tuesday, August 30, 2011

Scalability and Predictability of Investing

The premises of the trader and the investor with regards to how each views their gains, are distinct from each other. These significantly impact each of their buying and selling behaviors.

All in for predictability of business gains. The consistency inherent in excellent companies makes owning them bankable and scalable worthy of an investor committing and tying serious amounts of money indefinitely.
On one hand, a trader takes on the perspective that his returns are ultimately dictated by stock market capital gains (i.e. trading gains), and therefore, it shall only be necessary to buy and sell (i.e. trade) a stock position. The activity necessitates active management of cash/liquidity; naturally, the trader is concerned of being liquid in the end of the day (or week, or depending on his trade plan)—that is, being able to eventually close his stock positions and have them in liquid cash at his disposal to execute new trades. It is a relentless pursuit. That being the case, the trader cannot help but be always reluctant of committing serious amounts of money when executing a certain trade or play, because of the unpredictability of the schizophrenic market that is driven by the emotions of fear and greed.

An investor, on the other hand, is of the view that once he buys into a company, his equity are those of the company’s, and his returns and earnings shall be of the same. Hence, it is of little concern to continuously buy and sell a stock position. The intention, simply, is to purchase, to own and have the underlying business be responsible for profits/gains which would then enhance the shareholder’s wealth. Business gains, which is driven by earnings and internal cash flow, are easier to predict because they have that intrinsic characteristic of being consistent—provided, of course, that the business in question does have superior economics working in its favor which makes its predictable, profitable direction bankable.

This earnings and cash flow predictability and consistency is what the investor pursues and intends to ride and capture. Thus, upon discovery or identification of such a capable company (coupled with a depressed/bargain market price tag) the investor is inevitably prompted, with the dictates of his rational bargain-hunting and profit maximization urge, to fully exploit the circumstance. This only allows him to invest serious amounts of money and confidently commit them for as long as it is profitable to do so.

When a business is predictable and consistent in its gains, its inherent risks are visible and easily mitigated (if not virtually eliminated). If risks can be controlled and mitigated, one can confidently invest large amounts of money to fully maximize and exploit the earnings potential of the business. Thus, the scalability of investing (i.e. committing large amounts of money or even being fully invested) is only a rational dictate of profit maximization; it is only common-sense for someone to fully take advantage of and leverage on an excellent investment (given that the price is right). One just have to simply deploy all those capital (and no longer worry of cash/liquidity management to relentlessly pursue trades) and make them work as soon as possible for an indefinite period.

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The information presented here is for educational purposes only. Under no circumstances should it be construed as a recommendation to buy, sell, or hold any stocks. If you choose to use this information, you do so at your own risk.

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