Liquid public companies generally trade at a premium relative to less liquid public or private companies because, well, they should. Liquid companies provide investors with an embedded option to cash up or to buy in at the click of a button. This can be a very valuable option; particularly at the cusp of periods of uncertainty.

The public share price we see on our computer screen is only a reflection of the price a minority representation of shareholders has agreed to transact at a given point in time. This is not necessarily an accurate reflection of what the majority of shareholders are willing to transact at.

“Errors of Omission are More Costly than Errors of Commission” – Warren Buffett

As we discussed, people tend to hate losing money more than they like making it (i.e. loss aversion). Unfortunately, this protectionism can cultivate very expensive negative biases – costing much more in missed profits than averted losses.

Over the very long term, the odds are in your favour as an equity investor. Developed market equity market indices have pretty much all moved substantially higher over the very long term. There is also an asymmetry to the equity investment cost / benefit profile. When you put $100 into a stock or index the most you can lose is $100, but the upside potential is theoretically limitless. This payout asymmetry is the same reason option prices are positively correlated to volatility.

It will be tougher to generate unique results or insights by looking in the same places and reading the same things as everyone else. Getting out and talking to customers, suppliers, competitors and creditors can be uncomfortable but may tell you a lot more than reading an annual report. Malcolm Gladwell, one of the most prominent writers of our generation, is known for finding valuable insights from the “overlooked and misunderstood”. His disciplined research methods no doubt contributed to his success – spending countless hours reading trade journals, graduate research publications, and old newspaper articles – even, from what I understand, often at the local public library. Be like Malcolm. Turn off the world, and, to the extent resources allow, find out as much of what is true as you can – for yourself.

The core premise for this “only invest in what you understand” maxim is obvious and commonly cited. Other important reasons are less obvious. For instance, the probability of exiting a position prematurely escalates when you invest in a business you don’t understand well. You may have a very sound investment premise, but get scared off the position after a period of negative broader market volatility to reduce your ‘mental’ risk ranking – only to see the volatility subside and your original investment premise prove correct. This ‘mental’ risk ranking improves by selling the position, but it can also improve by just doing more homework.

It can make good sense to be a bit late and pay a higher price for high growth businesses – particularly those with very large target market, in the early stages of product or service adoption, and where there is likely to be only one or two winners. Facebook is a good example. After a certain point of user adoption, it became highly improbable a competitor could successfully displace Facebook as the preeminent social media platform. This was not true earlier in its existence.

Today companies need to have a strong understanding of the true stakeholder experience. This involves efficient management and analysis of user data, such as net promoter scores, but also involves qualitative assessments, such as focus groups and ethnographic research.

One silver lining to large-scale macro market corrections is that they are often the only periods where tier 1 assets become affordable. Tier 1 assets tend to have a disproportionate chance at making it through challenging periods and rewarding long term investors who properly identify these unique entry points. Take, for example, the German DAX index in the heart of the 2011 European sovereign debt crisis. Germany held a robust balance sheet relative to its peers in 2011, is the largest economy in Europe, the fourth largest in the world, and one of the most productive. The decline in the DAX nonetheless matched that of its over-leveraged neighbours – falling by over 30% within three months. The DAX appreciated >2.5x just a few years later; while most of the more challenged peer group simply reclaimed 2010 levels.

Asking these questions is a simple exercise that can add a lot of perspective. It forces the investor to think realistically about why they are considering the opportunity in the first place, and the associated probability of the various potential outcomes. These questions also help better frame the ‘margin of safety’ of an investment.