Tilson: These Are The 3 Most Dangerous Words in Investing

Join The Motley Fool for a conversation with author, investor and philanthropist, Whitney Tilson. In addition to managing Kase Capital, Whitney has coauthored More Mortgage Meltdown: 6 Ways to Profit in These Bad Times, Poor Charlie's Almanack, and most recently The Art of Value Investing, a collection of interviews with over 200 successful value investors.

A full transcript follows the video.

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Brendan Byrnes: You said that the three most dangerous words in investing are, "I missed it."

Whitney Tilson: Right.

Brendan: I've definitely been guilty of this. Amazon  (NASDAQ: AMZN  ) in the past, LinkedIn  (NYSE: LNKD  ) more recently, when you look at that and you say, "Man, it's too expensive now. It's had this run up, why would I buy it now?" How should individual investors look at this? Should they reevaluate how they're looking at the company, and ignore that?

Whitney: This gets to the broader issue of controlling your emotions in investing. The reality is, there have been numerous studies over the years that show that, in so many different ways, human beings are hard-wired to be irrational when it comes to making financial decisions.

They buy at the very top, they sell at the very bottom. They won't buy a stock if they've been doing research on it and the stock runs up 10 or 20%. They say, "I missed it."

This scenario, where Warren Buffett has said, "Once you reach a certain level of IQ, and you have a certain amount of experience and training and so forth, what differentiates great investors from good investors from poor investors is the ability to control the emotional side of investing."

A very wise friend of mine once said -- he doesn't wish to be named, but he's the one who gave me this concept of "I missed it" -- he said, "Whitney, any time you look at a stock and it's run up, the value guy in you and I both say, 'you don't want to chase the stock.'

You don't want to buy it after it's run up a bit, and it's very frustrating to look at a stock at $10 and then by the time you finish your research it's at $12 and you say, 'I missed it.'"

He said, "Any time you say that, just put that idea out of your head and start with a clean mind that basically says, 'Today I have the opportunity to buy this stock at $12.' If intrinsic value is $20, I should still be buying that stock, even though it's run from $10 to $12. It's still cheap."

When I've been pounding the table on this principle of, "Get those words, 'I missed it' out of your head," I'm not saying to go and pile into stocks in general at all-time highs today. What I am saying, though, is that there are still some cheap stocks out there, and many of them have moved up quite a bit. They may have even doubled in the past year, yet they could still be bargains today.

Don't anchor on what the historical price was. Just look at what the price is today, and determine whether that's attractive or not.

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