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Author: TMFMillerTime Big red star, 1000 posts Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 14749  
Subject: falling knives for two years.. Date: 7/1/2006 8:16 PM
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Can't believe it... two years. I guess one of the things that bothers me most about all of this is that, for some reason, that time seems to underscore the fleeting length of our investment lives. Well, it's been about four years total time at TMF and two of the falling knives... and boy oh boy! do I wish I'd done this 20 years ago. If there are any young investors out there reading this... PLEASE! start writing about your portfolio. These MF boards are so benign, populated with such fine people, it's a priceless opportunity to learn.

Hey!! let's talk investing...

EXPERIENCE
what does it take for an individual investor to develop a market beating plan for investing? First and foremost I think it takes experience. Good investing decisions come from experience. How does one gain experience... making some dumbass decisions! BUT... then learning from them :) Even for WEB, it took experience... just for him, his learning started at a far earlier age than most.

CONCENTRATE
To make it worth your time and to have a shot at beating the general market, I think it takes some element of portfolio concentration. I've got several ports that I run with different strategies. The more concentrated the port is, the better it has done... the most concentrated portfolio has utterly slaughtered the market averages. It's my wife's port. The portfolio been a 6 bagger over the last 5 years. I've visited it rather often over the past several months. In the 5 years, I've made (counting buys & sells) a total of 7 trades. You'll never believe what the last trade was! Acusphere! lol. Guess where my wife "bought in"? She got her's at $2.95. Because I trade so rarely in her port, I only buy things that are absolute screaming buys... One of my big problems is "entertainment investing". I think stock XYZ is "interesting" so lets buy some. I think I'm so smart that I can out-figure Mr Market... it'll kill you. The more I learn, the more I know that equity investing should involve big bets on stocks that are screaming buys. To think that a safe or prudent portfolio consists in having a small gamble in a large number of different equities where I have no information advantage with which to reach a good judgement is a travesty of one's portfolio management and a guarantee of mediocrity (or worse). Sometimes the only advantage needed is distance... not presently owning the stock and being emotionally distant, therefore being able to make prudent decisions on outlook.

portfolio concentration... not for concentration's sake but because true bargains are fairly rare and if I'm exercising reasonable prudence in my investments, portfolio concentration will be the natural evolution of my portfolio

DON'T YODEL

You walk past a co-worker or friend and hear them quietly singing a song... you say.... "you've got a nice voice". Next thing you know, he's yodeling at the top of his lungs and you think "I've got to be more careful with my compliments". Compliments and short term success can go to a fellow's head.

When you make hospital rounds with interns and residents, there are surprises galore. Occasionally, one will make a couple of astute diagnoses in a row. Suddenly, resident knows all and expounds on every patient, every illness, and generally becomes a dangerous overconfident doctor. He's yodeling. The yodeling usually doesn't stop til the yodeler has made a fool of himself.

I have taken up yodeling on many occasions in my investing life. BUT... only after writing for public consumption have I slapped myself in my own face with my yodeling. The original purpose of this series of posts was to illustrate using a long term holding value oriented strategy coupled with an options strategy to add 3-5% to the portfolio.... would be a market beating strategy. By in large, this has been the case and should be about as exciting as watching paint dry. Writing down my decisions in a forward looking way has allowing me to see multiple occasions where deviation from principles cost me money. If that occurs...

1- admit the error
2- do not let fear paralyse
3- make a rational plan for correction

ABOVE ALL, REMEMBER YOU'RE BUYING A BUSINESS
Equity valuation is actually not that hard. It does require effort. There are basic principles of business that are pretty easy to understand. I've learned that I've really got to be able to understand and explain my purchase of an equity to two folks... one is Lynch's three minute drill... but let's face it... the more important person I need to "convince" is KitKat or Mrchw or Canuck or BBQ or Admiral or... somebody who can see through the crap. In that regard, the most important things to me are....

1- T-R-Y to eliminate the sell decision by striving to choose investment in wonderful businesses at great valuations that will be able to grow and grow earnings for many many years... can't do it every time but that singular thought is at the top of my brain every time I make a move

2- Changes in perceptions of a company's fundamentals are the catalyst for the stock's movement. Those changes need to be anticipated before others do. Every equity I own, I can give a thesis for anticipated changes in fundamentals. This means I must know the company's key operating indicators to accurately anticipate changes in fundamentals. That may be patents and NPV analysis for a set of drugs. It may be changes in margins and comps for a retailer... whatever, I better understand it.

3- anticipating change requires an understanding the competitive position of a company in its industry. It's simply not good enough to understand ACUS or HGRD... I absolutely must have a clear understanding of the marketplace they seek to sell in... IT'S A BUSINESS, DAMNIT!

4- qualitative factors are prob more important that quantitative. DCF's are great and they are an absolute requirement for understanding the worth of a business... but understanding and predicting how the inputs to the DCF can or will change over time is what makes one an investor.

5- If you feel like you have all the facts about a company's prospects... you are buying an efficiently priced equity and will not get outsized returns. I've got top be able to make my investing decisions with limited and conflicting information... and have the ability to pull out the important (critical?) information. I promise you I can do that with a sick patient... I take alot of pride in my doctoring. Becoming an outstanding investor means doing that with a business.

6- the more complex my reasoning, the more likely it is to be wrong. Not need to elaborate...

7- the best investment are always anti-consensus. If the consensus opinion is correct, outsize results cannot be obtained. I was recently chided for my BSX investment... gotta have the ability to look stupid for a while. More importantly, I've got to develop comfort with feeling sort of stupid while the market takes the short term view AS LONG AS MY RE-EVALUATED INVESTMENT THESIS REMIANS INTACT

8- I need to look for fear and loathing in the stock market and be attracted to it. Look for emotional extremes of any kind... emotion always leads to poor analysis


DON'T FOLLOW ANYBODY
WEB espouses the LTBH... and many of us follow. But when he needed to raise some money for his personal use 20-30 years ago, he used all sorts of vehicles... options especially, short term holds, etc. whatever... there is no such thing as dirty money. In THE INTELLIGENT INVESTOR, Ben Graham details some professionals who wouldn't touch certain types of investment (less than investment grade bonds for instance) which would repeatedly lead to poor decisions.

We've all got different skill sets. You've got to find your little niche, WEB calls it the circle of competence, and exploit it. If it's baseball cards... who in the hell cares. If you can make money at it DO IT!!

The final cardinal rule for the investor is...
don't be an idiot



Next post we'll detail every position in the falling knives... and talk about 'em

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