In Friday’s edition of the Summer Series, Roger Montgomery explained in his Whitepaper (VIEW LINK) the difficulty of the task that investors face in avoiding a range of biases that threaten their returns. Despite our desire to be rational decision makers, our ‘humanness’ conspires against us and we engage in things like anchoring, herding, and loss aversion. As investors, we must find a way to deal with this if we hope to achieve above average returns.
One way we can help reduce our susceptibility is by maintaining a valuation on our investments. Valuations don’t require high levels of complexity, in fact, simplicity can be a virtue as it reduces room for error. In my own process, I use valuation to serve a number of purposes:
- Identifying a point of entry and exit for a position
- It gives me something to hold onto when prices fall
- The process of valuation forces me to complete appropriate due diligence
- It acts as a bridge between the story of a business and the numbers in my model
There are many different approaches to valuation, each with their own merits and shortfalls. If you’d like to learn more about valuation, Monash Investors have prepared an excellent guide to pricing and valuing stocks, which you can access here: (VIEW LINK)
Patrick was one of Livewire’s first employees, joining in 2015 after nearly a decade working in insurance, superannuation, and retail banking. He is passionate about investing, with a particular interest in Australian small-caps.