To 2015: 3 Lessons on Thinking in the Markets

2015 was another year of volatility. We witnessed the Swiss Franc unpegged from Euro, the boom and bust of the China stock market, the flash crash of US equities, the falling commodities prices, divergence of monetary policies and a lot more surprises. We did make mistakes, but we also learnt from these experience. Despite the market fluctuation, 2015 is still a fruitful year for Hanerest.

At the very last day of 2015, we want to share three lessons on thinking that benefited us throughout this year:

The first lesson is thinking in long-term when evaluating opportunities. Short-term returns can be attractive; but they are unpredictable and sometimes more risky. It is difficult to profit from betting where the market will go tomorrow or which central bank will surprise us in the next week; however, a macro trend is long-lasting, more consistent and has broader impact — just think of how the Internet has influenced our life in the past ten years. When evaluating opportunities, we ask ourself: what will it be like in 30 years? We focus on the future prospects of the industry and company, and emphasize on the competitive advantages (See our article: How to Identify Companies with Economic Moats?). We do not fear short-term volatility. We expect to gain returns in the long run.

The second lesson is thinking beyond the financial statements and ratios. Investors have access to identical financial information about public companies and have similar interpretation of them: the growth rate of the revenue, the return on equity, the cash cycle, to name a few. The problem, however, is that these statements are usually lagged and do not account for the true intangibles of the company, which has far more impact than most people think. New management initiatives or R&D do not reflect on the statements immediately, nor do the complains of the customers and the morale of employees. We always remember we’re studying a business with day-to-day operations, growth and interactions instead of a set of numbers that are published quarterly.

The third lesson is thinking differently. One can never beat the market by following the market itself. Expectations that are shared by most people are mostly reflected on the current price of a security; if you discover a stock with similar expectation of the market, you probably find a fairly-priced stock. To beat the market, you should have your own views and stick to them. Markets are more irrational than most people realized, and people often go on extremes: everyone buy when they think the market can only go up and sell as if every tumbling is another financial crisis. We take the crowd’s views as reference only, and we try to benefit from the irrationality of the markets.

Looking ahead of 2016, we do not expect it will be another ordinary year. Markets fluctuate. Markets surprise. We do not attempt to make accurate prediction of the markets; instead, we focus on longer-term trend across business cycles and are always prepared to take advantage of new opportunities when they emerge.

In the end, we would like to take this chance to express our gratitude to all people that provide support for Hanerest; without you, we couldn’t have achieved what we have today. We wish 2016 will be a better year, where we all will work hard and achieve our goals.

We wish you a happy new year.

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