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Author: rjf53 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 20304  
Subject: Re: Poll: Value Hounds Assessment Date: 9/9/2012 12:48 PM
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I hated Google at $125, Amazon at any price, CMG at $35 Lulu at $8 just because everyone else loved them. I figured they had to be crap. There is such a thing as constructive skepticism and contrarianism and then there is over the top beyond the pale mistrust of public consensus that becomes a detriment. That's where my investing instincts seem to run.

Hi Kitkat,

Reading your comments I am struck by how similar the issues you struggle with are to my own experience albeit from a different type/class of companies. I invest in smaller oil & gas producers quite heavily and it has been my experience that relying too much on a belief that I can place a value on some companies is simply a fool’s errand. This is not to say that valuation doesn’t matter, but rather understanding/accepting why the market values a company the way it does combined with a healthy respect for how quickly things can change is a much better approach than relying on my own valuation attempts exclusively.

My approach, although far from perfected, is to let what is happening within my basket of companies help me to deal with this inherent conflict between what makes sense to me and what the market is telling me. So while my instinct is still to seek out opportunities the market doesn’t recognize i.e. what I view as intrinsic value I have learned (am learning) that respecting what the market thinks can be every bit as important as what I think.

One of the reasons I like small oil & gas producers is that I am able to isolate distinct types of risk. Many investors are much more comfortable investing in the majors because their sheer size in effect makes them somewhat like owning a sector fund representing a diverse type of risks. While there may be some truth to this, by taking a basket approach with smaller companies I believe I can capitalize on temporary changes in markets or market sentiment in a way that a company like XOM could only dream about. One example of this is how the market will treat a heavy oil producer as oil prices fluctuate. Without wanting to sound too full of hubris I think it is safe to say, all things being equal, buying or adding to your position in a heavy oil producer when oil is at the low end of a trading range and selling or lightening up at the high end, if not exactly a license to print money, is certainly a way to reduce risk. The same type of thing happens on a regular, although unpredictable, basis when it comes to other types of risk whether that involves how the market perceives/values risk ranging from geopolitical, valuing different types of reserves, production levels, exploration risk, or exposure to different pricing etc. with the hope/understanding that these diverse types of risk/rewards leave me exposed to what ever may happen while allowing me opportunities to tweak my exposure along the way with the idea of reducing my risk

Tying this all back to your comments, what I have come to accept is this risk of overvaluation/momentum that my “instincts” have made me fear in the past as well, is really just another variety of risk than can and likely should be included in my portfolio on a balanced basis. Owning them doesn’t preclude you from lightening up from time to time to reduce your risk but not owning them will certainly preclude you from sharing in their gains.

I’m not sure if any of this made sense to you , but then I’m not sure if I was attempting to put my thoughts to paper for you or for me to begin with. :<)

Good luck and remember that "discouraging" is just your emotions attempting to shout down your intellect.

IMO the Smart money is betting on your intellect. :<)

Take care,

B
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