Sunday, 19 October 2014

Top four investment decisions that lead to gifts that keep on giving...

There is a lesson or two that investors can learn from the ant world. The ant and human being are the only two creatures on earth that raise a farm and move around with that farm. There is a symbiotic, or should I say, a reciprocating relationship between the ants and the mealy bug. Mealy bugs produce honey dew from its rear that provides sustenance for the ant to supplement its other food supply. The honey dew is akin to the dividend payment of a company that it distributes over the life of its existence. In a similar way, the mealy bug produces honey dew over the life of its existence, but it is better able to do so successfully with the aid of the ant community.

The ant community provides the protective moat that defends the mealy bug in exchange for the honey dew produced by the mealy bug and also protect it from its natural predator the ladybeettle. The ant community enjoys the benefits derived from the mealy bug and so they protect the mealy bug at all cost. The mealy bug is capital to the ant community and the loss of this capital will mean no honey dew to supplement the ant food supply.
 Ant Farming Mealy Bug videos:




 As an investor, loss of capital can cause serious damage to your portfolio holding. Your investment strategy must have some protective defense mechanism to cope with and prevent this loss of capital in the same way as the ant to their mealy bug.

 A margin of safety is a good protective defense mechanism to mitigate downside fluctuation. In addition to the margin of safety, a gradual concentration of an asset acquisition when buying is desirable, since market volatility and price fluctuation will deliver the benefit of acquiring more of the said asset at lower prices. The lower price paid will result in reduction in per unit cost hence bringing down the average cost per unit on the total investment. Price fluctuation is a feature of all markets and a lower cost will always have some impact on return on capital. The need to protect capital cannot be overstated. Rich people do two things well i.e. make wealth and keep it. It is as simple as that.. I cannot recall ever seeing a 1 800 LOSS OF CAPITAL hotline anywhere. It may take a long time for you to recover from permanent loss of capital should you need counsel since there is no hotline waiting with someone on the other end for you to cry to.

So let us get to the top 
four (4) gifts;
1.    Buy Dividend Paying Asset 
2.    Buy Asset with Solid Economic Defense (MOAT)
3.    Buy Asset Class with Symbiotic/Reciprocal Relationship (Economic lattice) and
4.    Buy Asset you Fully Understand
The key in any investment strategy is to survive market conditions and prevent permanent loss of capital and so asset price and selection must have some framework or check list that allows for a rational buying decision. Allocating capital requires great care and a check list of "things to do" can be helpful to prevent permanent loss of capital.

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FII