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Author: Valueinvestor91 One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 2674  
Subject: Are you an intelligent investor? Date: 10/20/2005 5:31 PM
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As a 14 year old investor, I find investing to be a fun pastime. If I invest intelligently I can even make some money. But as everyone has to realize you can also lose money. I have some guidelines I use to minimize my chances of losing money.

Back in the boom years of the late 1990's, when technology stocks seem to be doubling in value every day, the notion that you could lose almost all your money seemed absurd. But by the end of 2002, many of the dot.com stocks had lost 95% or more of their value. Once you lost 95% of your money, you had to gain 1,900% just to get back were you started. Taking a foolish risk can put you so deep in the hole that it's almost impossible to get out. I am sure that the tech stocks were not anywhere near a deal to be had preceding the collapse of their prices in the year 2000. So why were so many people buying? We call those people speculators. Buying because they believe that other more foolish people will come and pay an even more foolish price. They are certainly not buying based on the fundamentals of the business. They act on analyst recommendations. Most of these people are guided by charts or largely by mechanical means of determining the right time to buy or sell. The one principal that applies to nearly all of these so called "technical approaches" is the one that should buy because the stock or the stock market has gone up and one that should sell because it has declined. They also do not hold for very long periods of time racking up huge buying and selling cost. This is the exact opposite of a sound business sense everywhere else. I have not heard of a single person that has lastingly made money in these kinds of operations. I believe in quite the opposite approach to my investments. I buy based upon the characteristics of the business not the stock price. Every time I buy a stock I say to myself I am buying an ownership in a business. I would prefer to buy awesome businesses with a huge advantage in the market place (wide moat). I like to buy when the company is out of favor with the investing community when investors have over reacted on a piece of news. When I buy, I look for company's that have very little down side risk (Margin of Safety). I also don't believe in trading frequently as it cost lots to buy and sell.

Ask youeself are you an intelligent investor? Benjamin Graham the father of value investing likes to say it this way. It has nothing to do with IQ or SAT scores. It simply means being patient, disciplined, and eager to learn you also must be able to harness your emotions and think for yourself. “This kind of intelligence is a trait more of character then of brain” says Graham. I have a short example: If I own shares in Coca-Cola and my neighbor also owns shares in Coca-Cola that doesn't mean we are both value investors or speculators. I could have bought Coca-Cola because I understand the business. I also know that teens these days including me love Coca-Cola they drink 1, 2, or even 3 a day and they will probably continue to due that into their adult years further accelerating Coca-Cola's profits into the feature. My neighbor could on the other hand have bought Coca-Cola's stock because he or she thinks the recent run up in price is going to continue and could make him or her a few easy bucks. Speculation is always fascinating, it can be a lot of fun while your ahead of the game. If you want to try your luck at it, put aside the smaller the better-of your capital in a separate account for this purpose. Never add more money to this account because the market is up and the profits are rolling in. Maybe that's the time to think about taking money out of your speculative fund. If you can't afford to loss money and your just looking for a quick gain you should have absolutely positively have nothing to do with investing because you can lose money.

Why do you think the brokers on the floor of the New York Stock Exchange always cheer at the sound of the closing bell-no matter what the market did that day? Because whenever you trade, they make money. By speculating (trading often) you lower your chance of building wealth and raise someone elses (the brokers). Mutual funds were designed to diversify the portfolio with little risk and beat the market average with professional managers. Have they really done a good job for their shareholders. The funds have been bought by more than 54 million American family's. Mutual funds aren't perfect because of their imperfections, most funds underperform the market, overcharge their investors etc. I found an interesting fact that over a five year period only half of the 2,000 or so funds only 50% of them outperformed the Vanguard 500 index fund. The pressure to go with the crowd often makes for results that just underperform. I encourage every investor to think for themselves. I think that picking investments for ones self is highly unfoolish.

Don't over pay for a broker. Don't get stuck paying $50 dollars a trade because that's what the big banks charge for every trade. Sometimes brokerages charge you using a percent up to 5% a trade, I find it very hard to make money when you lose 5% of you capital with every trade you make. The best brokerages for your money in most cases are the online brokerages (Scottrade, Ameritrade etc.) they charge low fee's Scottrade's is $7 per transaction. They are also very helpful, my experience with them has been very good. They return my questions right away. I would highly recommend them.

If you pay a high price for a very good business you will do ok. But if you pay a great price for a great business that can mean the difference between a good return and a great return. Warren Buffett once said he waited over 20 years to start buying Coca-Cola. But that made all the difference. Don't ever be afraid to put an investment off for another time. Find a great company and wait for it to go on sale. That leads me to another concept margin of safety . Example: If a bridge can hold 30,000 pounds you would never drive a truck that is 30,000 pounds on it. The most you would ever drive on that bridge would be say 20,000 pounds. That's the Margin of Safety concept. Buying 1 dollar worth of assets for 40 cents, there is a great deal of security in that kind of investment. One quick example: The Washington Post Co. In 1973 was selling for 80 million in the market. At that time, you could have sold all the assets of the business to any one of ten buyers for over 400 million. The same properties are now worth over 2 billion. So the buyer at 400 million would not have been crazy. Now if the stock had declined even further to say 40 million the beta would have been greater and for those of you who think beta measures risk the cheaper price would have looked a lot more risky. This is truly Alice in Wonderland I have never been able to figure out why it is riskier to buy 400 million worth of assets for 40 million than 80 million. (Example taken from The Intelligent Investor)

I am going to try for the last part of my post to try to talk about things that apply more to me and other teen investors out there. I think especially for teens investing in things that we are familiar with. I don't know much about the integrated circuits business, but I do know a lot about Coca-Cola, Pepsi, K-Swiss, Disney, and Sony. What do you have to bring to parties, they serve you at just about every restaurant, comes with meals at McDonald's, and what I have on my desk right now, it's none other than Coca-Cola. I think every teen in the world could tell you why Coke is one of the best businesses in the world. I think teens have an advantage that a lot of professionals don't. I think we need to put that to are advantage.

It is getting harder and harder to save money these days. Most teens my age have an Ipod, Xbox or Play station, Cell phone, and in a few years a car that constantly needs a fill up. How can anyone save money. When you buy things I would consider putting maybe 10-20% of it away in the bank even if you don't want to invest you could put it in a certificate of deposit (CD). At 4% interest, that really adds up. Warren Buffett always said that the key to get rich is when you start the younger the better. Warren Buffet got interested in the stock market at 9 years old he started investing his own money in the stock market at age 12. If you can start young it makes all the difference.

Don't go into debt. I think not even getting a credit card at all would be a smart decision. You're just asking for trouble, and you'll end up paying more in the long run than you would with cash. It may seem easier, but you won't think so when the bills and interest are piled up in a few years. And checking accounts will only encourage you to spend. I don't believe in buying on margin either if you do lose money and your on margin your going to end up losing a lot more in the long run.

I worked this summer at a local restaurant and made about $600. My mom told me to consider putting that money in an IRA (individual retirement account). Instead of my regular investment account. I found many advantages of an IRA like no taxes. It is also a good way for teen's to save money because they won't be tempted to spend any of it. Because you can't take the money out for at least 5 years. Another good advantage is that when you make a purchase like a house or college you can take some money out of the IRA. If you invest $1,000 for 50 years at 5% it would be worth $10,401 just think if you would have invested $10,000 or instead of a 5% return it was a 10% return. But if you would of had to pay taxes it would have been a lot less. So just a small amount of money can go along way.

Lastly you have to love what your doing. I think it would be very difficult to be good at investing if you dislike doing it. All the really successful investors spend all their time doing investments so if you don't have a passion or don't like to invest (waste of time, boring, other stuff to due) I really don't think you should be investing.




~Alex
P.S. If you have a question, comment, or want to discuss this article with we more, my Email address is Alexbossert@yahoo.com .
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