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This post is an attempt to frame my investing philosophy and objectives for 2006. I consider myself a baby investor, having started this only in Oct 2003, and slowly but surely I have been untangling some of the knots and kinks of investing in risky securities.

Principles, Philosophy and Objectives . These three keywords forms a Mental Model or Map of my investing universe. Think of the mental model as a giant filter, as new information/facts/concepts gets filtered in, they either reinforce the model, add to a new node in the model or gets rejected. Because investing is not a precise science, you can be sound in your judgement and still lose money, conversely, you can be frivolous and read tea-leaves and be make lots of money (though I wouldn't call his investing). Such divergent cause-and-effect necessitates an Investing Map and Compass or else we will be susceptible to human misjudgments, such as getting distracted by shiny objects.

Principles
The centre of gravity of this Mental Model is a set of Principles. Think of principles as core values that do not change often, if ever. My Investing Principles are: 1. Commitment to Learning, 2. Margin of Safety, 3. Independent Thinking and 4. Patience. If one could visualise a triangle, Patience would be in the centre and principles 1-3 would represent the three Apex.

1. Having a Commitment to Learning will provides the fodder to this mental map; after good advice from fellow Fools, I am pacing my reading from the HG reading list as well as from this Ultimate list (http://boards.fool.com/Message.asp?mid=23079164 ). What is really effective is reading from the masters old and new and how they reacted in various scenarios. A recent source which I found interesting is ValueInvestorInsight, it goes through the picks and pans of various fund managers and an interview on their investing style. I used the word "Interesting" because even though they all profess to be Value Investors, they are all motivated by short-term thinking, ie. within a year.

2. Having a Margin of Safety cannot be emphasized enough. Having a MoS ensures we never overpay for a security. We can only have a Margin of Safety only if we can measure it. This implores us to learn about Valuation and the prices we should pay for a company. Having a MoS isn't just buying cheap stocks, just like this article from TMF Cop wrote, http://www.fool.com/news/commentary/2005/commentary05102503.htm , and I wished I had read it before I plunked my moolahs on PLB.

3. Independent Thinking means never to blindly follow fads. Take the recent Oil price increase, how can we be sure that it isn't a speculative bubble ? ( see http://boards.fool.com/Message.asp?mid=22911660 ) or as I wrote before about chasing after the first day Hidden Gems selections, also known as the HG Gems Pop, just because it is a hidden gem, it doesn't stay hidden too long when you have tens of thousands of subscribers eagerly waiting with twitching fingers to buy it at noon sharp on the fourth thursday of the month. One concept I am still learning and practicing is seeing "what is obvious and what isn't obvious". This is really hard, but as TMF Otter once wrote, "The sweet spot in investing is determining what is important versus what is not, and then determining whether these important things are valued properly. Anyone can do it. Few do", http://www.fool.com/news/commentary/2005/commentary05083009.htm Outsized profits can be realised only when we recognised these sweet spots that aren't apparent.

To practice Principles 1 to 3 effectively, we need 4. Patience. Unlike professional managers, we can sit on our hands and wait for the perfect pitch to come along. ( http://boards.fool.com/Message.asp?mid=21330049&sort=whole ). Like Principle no.3, having patience is not a natural human trait when it is applied to Investing. To quote Buffett: "I call investing the greatest business in the world, because you never have to swing. You stand at the plate, the pitcher throws you General Motors at 47! U.S. Steel at 39! and nobody calls a strike on you. There's no penalty except opportunity lost. All day you wait for the pitch you like; then when the fielders are asleep, you step up and hit it."

These four principles covers the basic 3 Ts of Investing: Time, Temperament and Training.

Philosophy
My investing style is largely divided into (for lack of a better word) 1. time-dependent investing and 2. long term buy and hold, Time-dependent means not holding a stock forever, it does not imply timing the market. I wrote at length on this in IV Central board, http://boards.fool.com/Message.asp?mid=23091085

Time-dependent investing will include (a) cigarbutt investing and turnarounds (b) special situations, mergers & spinoffs (c) cyclical stocks (though it is unlikely I know how to invest in cyclicals ). These stocks can't be held forever, and we need to monitor them when conditions change for the better (or worse). My world-view of Long Term buy & hold candidates will include (i) Global Consumer Brands with growing sales in BRICs (ii) Companies with strong moats and lastly (iii) small fast growers, ala Hidden Gems.

I will also refrain from investing in technology stocks for the long term, even though I am intimately familiar with the industry; it is fraught with unsustainable competitive advantage. Using an analogy from the movie "Be Cool", if IT hardware industry were similar to the Movie business then the software industry would be analogous to the music business: totally ruthless. There might be merger arbitrage opportunities but definitely not something I would be comfortable to LTBH.

Companies which do not fit this view will be filtered out.

Objectives for 2006
* To water the flowers and cut the weeds of my 2004 Portfolio. I did a first round of culling yesterday, selling off my beloved KKD, BDY, PLB and DHB (partial) and I used the meagre proceeds and reinvested in Discovery Holdings after finding significant insider purchases (via Form4Oracle.com )by John Malone in August & September. A more detailed analysis is required to review the existing stocks and make a judgment call on the 20+ stocks, whether to sell, buy more of, or just hold on. For my 2005 portfolio, it shall remain as-is.

* I will choose stocks for my 2006 portfolio according to my investing philosophy outlined above. To ensure a good entry price, I will maintain a watchlist of stocks that fits the mould and only buy when the market gives the price that I am looking for. I will hold on to cash instead of being "fulled vested" just because the funds are available. One objective which I was unable to achieve in 2005 was a concentrated portfolio, instead, my 2005 portfolio consisted of 17 stocks. I will attempt to keep the number of stocks down between 6 to 10 for 2006. I have begun to explore some of the stocks that needs more due diligence ( http://boards.fool.com/Message.asp?mid=23187284 ).


raytoei
who realises that he is especially long-winded on weekends
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