Post of the Day
May 20, 1999
Boring Stocks Folder
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Subject: Re: sale of csco
rpb: As a new investor (about 2 years), reading and learning about the companies that I invest in about 2 hours a day, I don't see how I could ever have an advantage like Dale says he needs to keep csco, does that indicate that I should buy mutual funds.
[The foregoing refers to the Boring Port's Report on the sale of Cisco]
I think that's a fair question, because we all sometimes feel daunted by the task of keeping up with our companies. Even with all this work, do we really have any kind of advantage?
Unfortunately, I think the answer to the question has to be complex. Rather than answer it outright (which I can't do, and would be incredibly presumptuous of me), I'd like to point out a few issues worth considering.
1) Some investing styles require more work than others. The beauty of screens like the Foolish Four and other workshop screens is that they cut down on your homework. Perhaps, you could argue, they cut down on your return also. But is the greater return worth the extra work you put into it? One can only answer this question for herself.
2) Some companies are easier to understand than others. Leading edge tech companies are not easy to understand, even if you work in the industry. Some understand the technology; others understand the markets; others understand the financial climate; yet others are attuned to broader societal trends which affect markets. Putting it all together is no easy task when all these components are changing rapidly.
Every year at his annual meeting Warren Buffett plays the idiot and says that he does not understand high-tech well enough to invest in it. Perhaps he should be taken at his word. But he's no idiot, and no doubt there is also a subtext. Buffett's fantastic track record is due in part to his avoidance of the downside of investing. He very rarely incurs losses, and his gains always far outnumber the losses. He is an expert in avoiding the risk of investing, and the risk of investing in high-tech can never be lowered to his comfort level.
3) Different people are better at gathering different types of information. For the vast majority of us, we are better at learning more about companies we do business with. This is almost too obvious to mention, except that it is important to recognize the advantage the other guy has over you. I put it to myself this way: if I'm going to invest outside my area of expertise, am I willing to do all the extra work it takes to reduce the other guy's advantage? Remember, the other guy could be learning as a natural consequence of doing his job 40-60 hours a week.
Dale can only speak for himself. Perhaps some of these issues touch on his reasons for selling Cisco; perhaps none of them do. But it's important to recognize the role comfort plays here. Comfort is a very personal thing, and it is essential to investing for the long term. Dale's decision is helping me to make some "comfort" decisions about my investments. Writing this message, in fact, is an exercise that is helping me make those decisions also.
Thanks for giving me the opportunity.