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My Progress as an Investor

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By OnTheRivet
March 1, 2005

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Be forewarned that this is coming of the top of my head

Since I have started to invest I have bounced all over the place. Instead of growing my sandbox (my sphere of knowledge) I keep jumping over to another playground and looking at their sandbox. Sandbox after Sandbox I never could or can find one that I can get comfortable with. (Sandbox is a term that I remember Dale Wettlaufer using when he was admirably helping the Boring Portfolio way back and what I view was the starting kernel of the FC. By the way I hope he is doing well and the FC gets back to its roots.)

Now I will readily admit that I am a slow learner but most of my problem stems from the lack of critical thinking and developing my own sandbox. You see I am a global thinker and investing in capital markets for a global thinker is very, very overwhelming. Furthermore I am also a jack of all trades guy and master of none (code for have a hard time sticking to one thing)! Yup, I am also left handed. Am I screwed, no just challenged.

I view the process of investing much like being a quarterback in a football game. When you are a rookie the game moves very fast. Result -- you take a drubbing (get sacked, throw an interception, delay of game etc). Now if you are able to learn quickly and gain experience the game starts to slow down. The actual game never actually slows down but you are able to process more information. Not only what's coming at you but also the options increase as ways of dealing with what's coming at you.

So I have been overwhelmed. I wrote a post on Liquid Lounge regarding my problem with market distraction. Emiller was kind enough to tell me just to turn off the TV. I wish it were that simple. However, to be fair, the original post I made was kind of lame and his response was to be expected. (Thanks E but I hope this post better describes my problem and solution)

So I realize that I am overwhelmed and the speed of the market is moving way to fast for me. I don't have a good view of the landscape. I view that to mean when I invest in a company regardless of my "research" or "due diligence" I still feel that the whole process is black box investing and that I don't have command to gain a real sense of an "edge". Or in other words I have a hard time separating Mr. Market from The Market. Who's the rube, me or Mr. Market? If I can't answer that then I have to assume I am.

I am the rube? No rubes in my sandbox please!

This brings me to the present. I have to get my own sandbox. But back to my problem where to start. Done: Top Down and Bottom Up with a little Industry Analysis as the Middle Man thrown in. Pretty big sandbox for such a small kid. So let me explain how this is going to happen.

First lets start with the top down.
From the book "The Bond King: Investment Secrets from PIMCO's Bill Gross"

Early in his career Gross felt, and still does, that understanding the basis of change in the marketplace acts as a control on emotion; he strives not to be taken by surprise, but rather to view change as just one more dynamic that can be studied and managed ...

I love it. It's me to a T. I have been investing without context. It's this context that allows me to understand what Mr. Market is up to and the landscape he is operating from. I see therefore defining my secular view in two distinct ways.

Above the Top: The Grossian way, which is a liberal education about world current affairs in a finance and non-finance context. Read a lot. Ask a lot of questions. Have discussions. Never stop learning. The more connections you can make the better.

The real time Top: Intermarket analysis. I have learned a lot by reading the commentary of John Murphy at StockCharts.com. I am not looking here to make money investing in QQQQ's or on a particular trading system. I want to know what the current relationship between Stocks, Bonds, Commodities, and Currency is. I also want to know or keep a rough eye on sectors within the US Stock Market as well as other Global market indices. These are what I believe are the primary trends in an overall secular trend. [i.e. are we finishing up a primary bull trend in a secular bear market.]

--Why? I have invested in a multinational like Rofin-Sinar. They have subsidiaries all over the world. How in the world will I know if the wind is in front or behind them if I don't wet my finger and find out!

-- Another Why? I have invested in Bed Bath & Beyond. From a top down perspective I can understand they are sharing the pain with many other retailers. Sure each business will behave differently but if the prevailing wind is money coming out of consumer discretionary into energy then their will be a downward pressure on BBBY regardless of its outlooks and the whole retailing sector should see a P/E compression. [This is not a post to argue for or against BBBY just to give an example.]

--Another Why? What if I have determined several co's on my watch list are ones I want to own but prices don't present enough Margin of Safety? If I have a rough idea when a sector might go out of favor or when the market has a probability of tanking, that gives me patience to wait and more importantly I know why I am waiting, and gives me purpose and a potential time frame for waiting.

And there is my developing and rudimentary Top Down Approach.

As for the Bottom Up [Details here aren't as important for this post.]

Well its pretty straightforward since I am posting on the FC board. Fundamental Analysis. My thinking is nothing revolutionary. I do believe that it is earnings that count (and yes I did buy "It's earnings that count" by HH and appreciate his time on the boards). I also believe that having an inflation hedged business and a wide moat are very valuable especially for investing for a) concentrated portfolio b)long term capital appreciation (OK I didn't mention His name but you get the point). Regardless I am more comfortable investing in companies that present both growth and value.

And finally the middle.

Michael Porter's (the famous guy Whitney Tilson worked for) work on competitive strategy should always be kept in context when reviewing initially and keeping in check any business that one owns for deterioration on fundamentals. This industry has characteristics that the individual firm has to contend with. Internally its Capex, Margins, Capital Structure, etc and Externally potential for growth in that particular industry.

Ok the last part about the middle seems somewhat forced but I bring it out because it is implicitly involved from both the top down (industry size and growth potential) and bottom up (margins, capital structure, individual growth potential.)

---OK I will stop there. That's my progress in [the] form of a sandbox. I realize everyone is different but I hope my sharing has been helpful.

Matthew


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