DES PLAINES, IL (Nov. 16, 1999) -- Here at the Workshop, we make many statements about keeping your emotions out of investing. This doesn't mean that you can't get excited when one of your picks does very well, like Qualcomm (Nasdaq: QCOM) has done in many of our monthly or quarterly screens. Rather, you try to be as objective and accurate as possible in evaluating your investments.
A few weeks ago my fiancee, who is not particularly interested in investing, asked how the European stock market had been doing. Naturally, I was curious about her sudden interest in international investments. Turns out a friend of a friend of hers sold his car for about $30,000, put that money in the Greek stock market (my fiancee is Greek, as are many of her acquaintances), and somehow wound up with "about" $150,000 in less than six months. She was wondering A) how someone could have done this, and B) if there was any way we could do this.
So, I asked her for more information. Details were sketchy, of course. (Aren't they always?) Was it a $30K starting investment, or more? Was it a $150K total, or less? Exactly what was it invested in? Stocks, options, what? No specific answers. Just some stuff related to a foreign stock exchange, which resulted in some unquantifiable but large profit over an indeterminate but relatively short period of time. How has this person done in the past? No idea.
Of course, there's another factor, beside the lack of specifics. We always hear the stories about so-and-so who "won big" in the market or at the casino. But how often do people call up and say: "Guess what. I just lost $10,000 in the stock market! Yup, my investments are tanking bigger than the local aquarium!" If your friends are like mine, they talk about their losses about as often as Bill Gates speaks glowingly of antitrust law. This is another problem with those stories you hear from people, which often go under the oxymoron of "anecdotal evidence." Good investors don't go for anecdotal evidence or use slipshod logic. Good investors establish objective criteria for their investments, and don't let emotion or ego get in the way of their analyses.
Over 10 years ago, there was a baseball writer named Bill James who published an annual Baseball Abstract. James did something that was revolutionary in sports writing. Rather than looking at an issue (Does frequent base-stealing help a team?), coming up with an opinion (Sure it does!), and then selectively quoting statistics and "expert" opinions to back up his beliefs ("All the guys say Vince Coleman won us 10 games last year with his running, and the Cardinals went from fifth place to first."), Bill James did something different. He looked at an issue, came up with a way to study it, researched the numbers, and analyzed at the results. He then formed an opinion based on the evidence, and he had solid groundwork for that opinion. He also wasn't ashamed to admit when the results of his research were the opposite of what he had expected. Much of what he said was viewed as heresy by the "Wise" sports analysts and baseball insiders, but over time many of his views were slowly adopted by them, as he had a nasty habit of being right.
Here at the Workshop, we don't just come up with an idea that sounds good and decide to use it, while making up reasons why it SHOULD work. We come up with an idea, figure out a way to define it in clear, objective terms (our "strategies"), and then rigorously look at how it actually worked in the past. If the strategy outperformed the market, it goes into the "good idea" bin. If not, then we don't make excuses for it, although we might try to learn some lessons from it. The "good ideas" get analyzed in an attempt to determine how they work, and to see if we can come up with even better strategies.
Even if you're not a big user of Workshop strategies, you can still benefit from this approach. Just remember to define, as objectively as possible, the buying and selling criteria for your investment, BEFORE you invest (not three months later when the stock is dropping and you're in a panic). Assess your performance as accurately as possible, and always compare your returns to the market (15% ain't that great if the S&P has returned 25%). And don't be afraid to admit you're wrong. Heck, you can even tell that friend with the successful friend about your losses, preferably when they ask if they can borrow some money.
Feel free to drop by the Workshop message board to learn more about objective stock-screening techniques. Until next week, Fool on!