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from my caps blog
Part I: Baby Step Investing

I consider myself a baby investor, having starting investing only in late 2003. In retrospect, I was really lucky. I dabbled in interesting things that didn't do much to my investing performance (like looking at timing the market based on the Lunar effect, or buying stocks that oscillated between predetermined highs and lows etc).

Thankfully, I bought stocks during a time of maximum pessimism in the market where it was really hard to lose money at the bottom. At one stage I had about 100 stocks in my portfolio, and my investing mistakes were more than adequately compensated by winners, which in hindsight resembled the S&P 500 index on a rebound rather than superior stock picking.

Investing principles are broad values that one adheres to in investing. Unlike specific skills in an investing toolbox, principles do not change. So while portfolio management is a skill can be picked up and further refined, principles like "Buy and Hold" is a Principle which an investor will deem to be true.

My 3 investing principles are:

1. Think Independently. This is my first and perhaps my most important principle in investing. Thinking independently means never having to rely on tips and rumors on the bulletin boards. It is contrarian in nature but not for contrarian’s sake, but more like a good dollop of healthy skepticism when viewing potential investments. I have learnt that good stocks prices with negative news can remain depressed for a long time. It makes sense to buy in thirds, that is, buying an initial 1/3 position on a stock and if it moves against you by a wide margin, say 20%, or more, put another 1/3 down and so on. Buying in thirds achieves 3 objectives, it makes me want the prices to go down further as it cheapens my cost base, and the other objective is that it extends my investing horizon. Lastly, it forces you to keep spare cash. Having more cash than ideas is a lot better than having a lot of ideas but no cash to invest it in.

For example, currently 7 of my 18 stocks are currently under water despite what is turning out to be a very good 2007 year. I am bothered that I could have missed out on a valuation or two, but I am salivating more because out of my in-the-red 7 stocks, only 1 or 2 stocks do I consider speculative. The rest are good quality stocks screaming out for more to be invested in, some of them already have a full position, while others already have 2/3s invested.

2. Always be Learning. To become an artiste, you have to first train as a craftsman. In my opinion, picking the right stocks can be attributed to three reasons, one is the result of luck, another is the result of superior insight and analysis and the third reason is due to tips / insider information. I would prefer luck to the other two reasons any day, but since Luck comes to me far and few (same goes for insider tips), I have resorted to learning about stock analysis and to hone my skills in this area. Learning takes many forms. Unlike learning a new computer skill, what I learn in investing is almost certainly reusable in the future, stuff like reading a cash flow statement, or the various valuation techniques is not going to change drastically in the future. Some of the best books on investments were written yonks ago and are still very applicable today. As a wise person once said, while it is good to learn from our own mistakes, it is always better to learn from other people’s mistake. Learning and reading and writing are self-reinforcing, it gets better with time.

Part II

As famed value investor Michael Price was once quoted saying that he doesn't have an investment strategy, what he has are portfolio components (value stocks, arbitrage, bankruptcy investing) and an investment philosophy.

"We don't have a strategy - it's the wrong word; we have a kind of philosophy of buying assets at a discount, and our approach by those three things: Graham and Dodd [value] investing, bankruptcies and deals. That's all we do. We don't really look at other groups."

My previous post mentioned 2 of my 3 philosophy:

(a) Think Independently

(b) Always be Learning

My last investing philosophy is "3. Buy with a margin of safety". I chose this over "Long term buy and hold" because buying low and selling high is one true maxim that worked, works and will continue to work in the foreseeable future. I am undecided about LTBH, though I do tend to hold on to stocks for a long time (my earliest stock is Coca-Cola at 38 ~ 42 in 2003 which I am still holding).

The three words margin of safety packs a punch because it tells you that (a) stocks have an intrinsic value (b) and the value can be calculated (c) stocks will rise up (or go down) over time to its intrinsic value. My favorite quote on MoS is from Buffett: "Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good results.”

The glue which binds all the three components of my philosophy is “Patience”. Being patient means having realistic expectations to let your ideas blossom, my investing hero Walter Schloss, who doesn’t believe in LTBH, has a turnover of 25% (ie. a 100% portfolio turnover every four years) , while Peter Lynch believes that small caps stocks perform best in the third to fifth year, that is where most of his famed multi-baggers came from.

This brings a good point on my investing expectation. My expectation on investing is currently 2 x 5 y. This aims to double the value of my portfolio in five years, which is roughly 15% a year compounded.

(To be continued)

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