Sunday, April 11, 2010

My philosophy on investing and the stock market

Here's my philosophy of the stock market: It is not logical. It moves based on a million people making a million decisions for a million different reasons a million times everyday. It's like an ocean liner that has a million blindfolded people rowing to make it move. Everyone is rowing in their own direction, and the ship just meanders around. Every so often, enough people by chance happen to row in the same direction at the same time and voila, the ship moves a few inches in that direction.
I only invest in stocks. I don't do any SWAPS, calls, puts or any other type of derivative. I don't invest in T-bills, bonds or any other debt. Why? Because I don't understand them as intricately as I would like to nor do I have the time to sit and learn. TO INVEST IN ANYTHING YOU DO NOT UNDERSTAND IS STUPID.
I don't invest in mutual funds because, to make a long story short, I can lose my own money for free. Win or lose, you still have to pay the fee. If an advisor can guarantee me a return substantially higher than the market PLUS his fees, then we can talk. The day a money manager guarantees a specific return on an stock within a certain time frame is the day I consider using his services. Until that time, I can throw darts at a wall (like the WSJ used to do) and, in my opinion, have just as good a chance of getting a decent return as an investment advisor.

Don't let the smooth taste fool you. I have done the hard analysis of looking at 5 and 10 year returns, looking at the industry and individual stock beta, and analyzing the charts. All that hard work and research didn't, in my opinion, increase my chance of making a good return. Why? Because, to use another metaphor, it's like looking at all the addicts in a crack house and trying to predict which one is going to overdose next, recover or die. It's trying to apply logic to something that is illogical. With crackheads and stocks, there are too many different things that can impact an event. To continue the drug addict metaphor, to even begin to predict the outcome of a drug use event, you would have to know the quality of the drug, the quality of all drugs used in the past, the outcome of each event, the length of time between each event, the physical and psychological impact of each event, the physical health of the addict, the family health history of the addict .... See my point? Then, what's the likelihood of a police raid? another addict harming the addict in question to steal his or her drugs? an earthquake? the crackhouse collapsing? the addict's family doing an intervention? or 50,000 other things that could happen? Take that same approach to stocks, what's the likelihood of someone deciding they should invest and choosing a stock in a specific sector alphabetically? Let that happen 100,000 times in day and boom, the stock moves. Even on days when there is no news about a company, it's stock moves. Why? Beats the daylights out of me. Think about that the next time someone tells you they understand the stock market.

Having said that, I do conduct some research and when I mention anything I buy I will try to tell what I read and why I chose to buy or sell what I did. Some very educated advisors or financial experts might call my style crazy. And they may be right, but at the end of the day it's not the style that's important, it's the return. And I have had it backfire. I bought ENRON at $1/share, and sold it a month later for $.05/share. But I have also made about 200+% on one of the cell phone companies about 3 months ago over a 2 week period. Call it luck, whatever. It's about the money.

Speaking of returns, i am not rich. I have to go to work everyday and plan to have to do so for a few more decades. I say that to say that I don't invest more than I can afford to lose. The number one rule of investing is to be able sleep at night.


What about the Peter Lynch's of the world? Dude was good. I think I heard him say in an interview once that he would ask his kids what their friends were buying. Based on those conversations, he would decide what to invest in. That always stuck with me. Not charts and historical returns, what were kids buying.

What do i think of financial advisors? I have no opinion. I think for some people they provide a very valuable service, depending on the person. I personally have no use for their advice.

So, why am I doing this? I like to spread knowledge, I have taught investment workshops in my church and I like to see the lightbulbs go on.

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