To celebrate this holiday season with my fellow investors, I put together "The 12 Days of Value Investing" -- with a little help from some famous value gurus:
First Day:Rule No. 1: Don't lose money. Rule No. 2: Refer to rule No. 1. We don't want to lose money on any investment, although some will inevitably do so. The stocks most likely to lose money are those whose valuations rely on aggressive growth assumptions. Investors who bought Vonage (NYSE: VG ) and Overstock.com (Nasdaq: OSTK ) last winter know this reality all too well.
Second Day:Be an investor, not a speculator. Too many investors jump on the momentum bandwagon and chase stocks just because the price is going up -- remember KrispyKreme (NYSE: KKD ) ? Most believe they can get out before the stock price crashes -- but few actually do!
Third Day:Value is what you get, price is what you pay. Valuation always matters. Learn how to value companies. We spend a ton of time valuing companies here at Inside Value; we believe, for instance, that UnitedHealth (NYSE: UNH ) and Wal-Mart (NYSE: WMT ) are trading below their intrinsic values. (In fact, I believe that to be the case about a good number of our 2006 Inside Value recommendations.)
Fourth Day:Buy with a margin of safety. Estimates of value depend on a wide variety of inputs and are never hard and fast. Buying stocks at a significant discount to valuation estimates provides a margin of safety.
Fifth Day:Stop trying to predict the direction of the market. Timing the market is a futile exercise that no one has consistently mastered. If your investment thesis is right, the market will eventually come around and reward you.
Sixth Day:Patience is a key element of success. Don't chase a stock with a price above your margin of safety; wait for it to come down. Having bought, wait patiently for the market to realize a stock's value. This may take weeks, months or years.
Seventh Day:Never invest in businesses you can't understand. The simpler the investment thesis, the easier it is to understand. For instance, if you don't know much about the semiconductor industry, it's best to stay away from companies like Marvell Technology (Nasdaq: MRVL ) and AgereSystems (NYSE: AGR ) .
Eighth Day:Invest for absolute returns. Beating the market index is a laudable aim, but there's no prize for breaking even when the market is down 5%.
Ninth Day:Be greedy when others are fearful and fearful when others are greedy. Don't let the market psych you out of a good investment. Most investors swear off stocks when the market declines and greedily buy when it is up. To be successful, be contrarian.
Tenth Day:Watch the business, not the stock. Checking quotes every day won't improve your chances of success. Instead, watch the business fundamentals and management's actions -- those are the real drivers of value creation.
Eleventh Day:Know when to sell. It's generally better to buy with a view to holding for the long term, but it may be better to sell if you have a better investment for your money, if your reason for investing changes, if your investment thesis was wrong, or if you simply need the money.
Twelfth Day:Have fun with your investing. This is The Motley Fool, after all, and we aim to educate, amuse, and enrich. There are far more important things in life than investing, which is only a means to an end.
... and a partridge in a pear tree
So there you have it. It has a catchy melody, doesn't it?
Here's to a joyful and prosperous 2007!
Philip Durell is the advisor/analyst for Motley Fool Inside Value. If you're interested in learning more about value investing or seeing Philip's full lineup of picks (which are beating the market at large by 6.5 percentage points since inception in 2004), click here for a free 30-day trial.
Philip does not own shares of any company mentioned in this article. UnitedHealth is also a Stock Advisor pick. Overstock.com was once a Rule Breakers selection; Krispy Kreme was once a Stock Advisor recommendation. The Fool has a disclosure policy.