It's that time of the year again. As we wave goodbye to 2006, which was a great year for most investors with the Dow Jones up 15%, the S&P 500 up 13%, and the Nasdaq up 10%, we should take this time to reflect on deeper issues, such as the long-term value of our holdings.
I recently read an article about the difference between being good and being great. One of the points that really struck me was that those who achieve greatness not only work extremely hard but also focus on improvement in bite-sized and deliberate chunks. For example, an athlete who decides to practice 10 hours a day could be considered very diligent and can become a very good player, but a great player will focus on specific aspects of his or her game, such as improving a left-handed lay-up or fade-away baseline jumper, and continually perfect every minute aspect of his or her game. Such is the difference between goodness and greatness. With that being said, I've made my New Year's resolutions for 2007 according to the principles of focused improvement.
Resolution No. 1: Stop checking stock quotes.
This seemingly trivial resolution has big implications. If you're checking a stock quote, you want to know what the value of a stock is right now. You want to see what you can sell your ownership of company X for at this very moment.
However, as a long-term value investor, I didn't put 15% of my portfolio in InterActiveCorp
Resolution No. 2: Perform 360-degree due diligence for every investment.
I recently conducted an interview with Second Curve Capital's Tom Brown, one of the best hedge fund managers alive. He talked about his 360-degree due diligence, which involved his firm talking to a company's senior-level, mid-level, and front-line employees, as well as its customers, suppliers, and competitors, to get a complete view of that company. In doing my due diligence, I often stop after talking to a company's senior-level executives, if it's a small company, or the investor-relations department, if it's a big company. However, a company's cash-generating ability is a function of its interactions with competitors, suppliers, and customers, and those interactions happen at every level of a company's organizational structure, not just at the top. Thus, it is obvious that I need a more holistic view of the companies I research.
Resolution No. 3: Focus on specific industries.
It's hard to really judge a company without judging its competitive environment. For example, to the untrained eye, the 1934 Harlem Globetrotters might seem like the greatest basketball team in the world, with a 152-2 win-loss record. Compare that with the 1995 Michael Jordan-led Chicago Bulls, which went 72-10. However, anyone with any knowledge of basketball would know that the Globetrotters played against teams paid to lose, whereas the Bulls had to fight for every win.
Similarly, industry knowledge is critical to establishing a circle of competence, which in turn is critical for achieving superior investment returns. For 2007, I plan on learning as much as possible about property and casualty insurers, such as auto insurer Progressive
These are my value-investing New Year's resolutions. Feel free to borrow from them!
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Fool contributor Emil Lee is an analyst and a disciple of value investing. He owns shares of InterActiveCorp and appreciates hearing your comments, concerns, and complaints. The Motley Fool has a disclosure policy.