POST OF THE DAY
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Re: My Progress as an Investor

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By EightTrack2
March 4, 2005

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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.
Congratulations on your Post of the Day. Here's a few actions and approaches I have taken to fashion myself into a better investor:

1) Every time you buy or sell a stock, write down your reasons for doing so, along with the price and the position size (as a percentage of your portfolio). I know it sounds elementary, but it's important to record your exact reasons as the moment of the trade.

A few weeks or a few months later, your mind will play tricks on you and it will be impossible to clearly discern why you made a change. So record the reasons at the moment of the trade.

Examining old trades, you might discover you tinker too much. Or too little. Too much top-down macroeconomic thinking may be invading your decision-making. Or, something else.

2) Scale in and scale out. You don't have to buy at the low or sell at the top. I know many are enthralled in the "margin of safety" idea and "backing up the truck" approach, but really, it's okay to make a little less money by buying at cheap rather than darn cheap. Sometimes stocks never get darn cheap.

3) A Martian favorite: follow many stocks within a single industry. At the very minimum, follow 3. You want to know how your competitors interact. Heck, imagine owning Sears or Kmart years ago and failing to follow Wal-Mart. You'd feel pretty stupid today.

As a corollary, when you buy a major position in a stock, buy a dink or some itty-bitty amount of the leader(s) in the industry. We tend to follow more closely what we own (human nature). So when I bought ESI, I bought a little Apollo Group, even though it's superficially (at least) expensive. Consider it a knowledge insurance policy.

4) Make sure you're a good concentrated investor. There's a value investor perception out there that true followers of the faith concentrate. Well, maybe they do. Certainly it makes sense to invest more in a stock that's selling at 50 cents on the dollar than 40 cents on the dollar, right?

Maybe not right. Your return is not only generated by the depth of the discount but by the speed in which that discount is corrected by Mr. Market. So that 40-cent discount, if it's corrected earlier than the 50-cent discount, may be the better investment.

Since we can't predict when Mr. Market will react to each stock, I don't think concentration makes sense except in general groupings. That is, put more money in stocks that are very undervalued versus somewhat undervalued. But within the "very" or "somewhat" group, weigh them evenly.

5) More Lynch and more Buffett and less Gross. Go with the guys who have purchased and sold stocks successfully in various markets. Lynch has nice checklists and groupings (stalwarts, fast growers, etc.)

6) Don't make market calls. Ask every market guru what did they do in early 2003. Most of them were probably waiting for the next leg of the Secular Bear Market. The nice thing about being a bear is that people think you're smart while you're predicting doom and gloom in the not so far away future but not right now present.

In fact, don't trust anyone who uses the word secular in the same sentence as market.

7) Don't sell winners all the way down to nothing. Then you end up dropping coverage for some new pretty thing. Meanwhile, the old lady that made you money keeps on performing - despite being "overvalued." There's always an exception to every rule, and the rule is sell an "overpriced" stock that doesn't make money with a bad balance sheet.

But great businesses that make lots of money can find ways of making more money. That's what makes them great!

ET


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