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Financial Fluidity
One of my Incarnations (in this lifetime) was that of an Investment Advisor, Stock broker,& Insurance Broker. I still read all or most of the old data sources. Since some of my readers who are "in the know" about this tidbit, ask me questions off-line, I've decided to post on-line.
Date: 5/24/2005 11:02:26 AM ( 19 y ) ... viewed 1895 times If you have ever said -- or even thought -- any of the following, you need to re-examine your investing philosophy.
1. 'I love this company.'
This is the statement that gets investors into more trouble than any other, and here's why: You are not buying a company -- you're buying stock in a company. There's a universe of difference between the two.
Warren Buffett of Berkshire Hathaway (BRK.A:NYSE - news - research) buys companies; Cisco Systems (CSCO:Nasdaq - news - research) CEO John Chambers buys companies. When Jack Welch was running General Electric (GE:NYSE - news - research), he bought companies. Mere mortals such as you and I -- we only buy stock.
It is arrogance to imagine you are purchasing anything more than a one hundred millionth of an ownership stake (or less) in these firms. The action of that equity is much more important to you as an investor than your personal affections for the entire company.
Microsoft (MSFT:Nasdaq - news - research) is a good example of this -- in 2002, you could have paid as much as $35 (postsplit) or as little as $20 per share. It's still the same company, but at the recent price of $26, one buyer is up 30% while the other buyer is down more than 25%. Same company, different entry prices for purchasing the stock.
That's why pricing and timing are so important.
Loving a company will not make up for a bad buy. Unlike VCs and corporate chieftains, we don't get to buy business models.
2. 'I am a long-term investor.'
The most astute thought ever put to paper about this statement was the classic quip by John Maynard Keynes: "In the long run," Lord Keynes said, "we are all dead."
The long dirt-nap aside, being long term does not mean abandoning the responsibility to set reasonable sell triggers on both the upside and the downside. Long-term investors should still review their holdings monthly (if not weekly) for various sell signals.
6. 'This stock looks cheap down here.'
Any time you hear this tidbit, you can bet that either 1) the stock just got killed because of some awful news, or 2) it's in the midst of a long and relentless downtrend.
Don't confuse stock price with value. This was especially true in 2001 after all the prior splits. Sun Microsystems (SUNW:Nasdaq - news - research) is a perfect example. Monday's closing price of $3.89 may sound inexpensive, but don't forget the five splits between 1995 and 2000; back them out, and the stock is $124.48. Same $13.25 billion dollar cap, but it doesn't sound so cheap minus the splits.
Of course, some stocks do actually get cheap "down here." But it has nothing to do with the numerical price.
7. 'This fund did great last year.'
This is the flip side of "looks cheap down here." It comes up whenever someone is considering putting money into a mutual fund.
It is the investing kiss of death.
Studies have demonstrated that last year's hot fund is this year's loser. The prior year's performance is the single worst indicator of the next year's numbers.
Some funds did well because their niche was hot that year. It could be a region -- last year, it was energy, a few years before that, Russia. Sometimes a sector is the flavor of the month. Defense was recently the darling of the moment.
Funds that represent niches often outperform in some years and badly underperform in others, as the factors leading to their outperformance were aberrational and often unlikely to repeat. That's why chasing last year's news usually results in poor performance
To be continued......
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