This was post #5 on this board. http://discussion.fool.com/back-in-may-of-this-year-i-posted-thi…. It was one of the key posts of my philosophy of investing that led me to set up this board. For context, this was posted here on Jan 2, 2014. You’ll find a number of posts in this series are from the first 30 or so posts on the board because that is when a lot of the basic philosophy was posted.
Back in May of 2013 I made this post in response to a remark on another board that expressed doubt that anyone could consistently beat the indexes or averages.
By the way, I pay no attention to what the indexes are doing, or “beating the averages” as my goal isn’t to beat the averages but to make a profit and average between 30% and 35% per year. If the market was down 15%, I wouldn’t feel I did well because I was “only” down 10% and “beat the S&P”. It’s not a game. I need to make money at this as my family and I live off what I make.
Here is that earlier post, slightly updated, as all of my posts may be:
Listening to this discussion, I have to comment on my own personal experience. For 17 years, from 1991 to 2007, I averaged 32% compounded without a single down year. I figured that by the percent gain of the money in the account each year. No gimmicks. (32% compounded really multiplies your money, by the way). I then was badly negative in 2008 like everyone else, which broke my streak. From 2009 through 2013 I averaged 28% compounded. Here are my thoughts about investing:
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Stock picking does work (obviously). Especially if you are lucky, as I must have been.
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32% a year compounded doesn’t mean you make roughly 32% every year. For example, here’s a string of the gains of my entire portfolio for twelve consecutive years starting in 1993. Numbers are percent gain. In other words 21.4 means every $100 turned into $121.40, and 115.5 means every $100 turned into $215.50. Here they are: 21.4 - 15.4 - 43.4 - 29.4 - 17.4 - 4.9 - 115.5 - 19.4 - 46.9 -19.7 - 124.5 - 16.7. (So don’t be discouraged if you only make ten percent some year. Keep trying for good gains).
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Go for companies that are growing fast, and hopefully that are not yet discovered and bid up in price. Avoid “story” stocks that are always going to make money next year or in two years or in five years (Westport is an example of what I mean, or early stage biotechs whose drugs are still in preclinical). If it’s next quarter, that’s okay. Absence or near absence of debt is important, except in companies where debt is part of their business model, where it’s sort of excusable (like companies that have made a lot of acquisitions).
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It’s a lot harder to make great returns as the amount you are managing gets larger. You can’t just get in and out of a stock with one or two trades as the dollar amounts become too big. You can’t invest in companies that are really small or illiquid, because it’s too difficult to accumulate a position that will be meaningful to your portfolio. And if there’s bad news you’ll be stuck and unable to get out in a hurry without moving the market. It’s like turning a battleship instead of turning a motorboat.
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When you are first starting out you don’t mind concentrating your investments in half a dozen winners. However, when you are retired, and you are investing for a livelihood, and you don’t have any other income to replace potential losses, you don’t let any position get too big. You never let a position grow bigger than 12% to 15%, and even that is way too much, no matter how much you like the company. (My biggest position now is just under 9%).
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Trading in and out is self-destructive. You remember the trades where you made a few dollars and it encourages you, but you forget the losses. Never take a position to make a few percent. You should be investing in stocks that you can see at least tripling, if not going up ten times.
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A corollary of this is to never miss getting into a stock because you are waiting to buy it 25 cents cheaper. The decision is whether you want to invest in it or not. Once you decide, take a starter position, at least. Don’t wait around for a slightly better price. When it’s at $50, I can guarantee that you won’t remember or care whether you paid $10.05 or $10.30, but you’ll be kicking yourself if you didn’t get in. (For a concrete example, earlier this year (2013) I bought some shares of a little unknown company AMAVF at $15 and change. It hit $170 this week for an 11-bagger in less than a year. Do you think I care whether I paid $15.25 or $15.50? The issue is: Do you want to buy the stock? If the answer is yes, don’t fool around trying to buy it a bit cheaper. You are buying with a long-term perspective.)
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I now have about 25 stocks in my portfolio, plus or minus.
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You can’t really keep track of more than 20 to 28 or so stocks, and that’s an outer limit. You need to read all the quarterly reports, and the transcripts of all the quarterly conference calls, which gives you a busy earning season. They often say a lot more on the CC than in the earnings release. Reading the transcripts works much better than listening to recordings as it takes a quarter of the time, and you can skip the forward-looking statements messages, etc. Look at investor presentations too. And get a news feed from your broker on each of your stocks.
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You can beat any mutual fund over the long run. You can’t tell much from a mutual fund’s results because you are always buying last year’s results. For example, if it’s a oil company fund, and last year oil stocks were in, it will show great results, but this year it could do terribly. Also, you are always buying the results they had when the fund was much smaller and nimbler than it is now (because those good results they had when they were tiny made people pour money in).
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You can beat ANY index over the long run, in spite of what you may hear.
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I always buy with the idea of holding for years but I often have to sell out sooner as conditions change.
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If you have the time, do a weekly graph on your stock, on old-fashioned large graph paper. It helps you keep things in perspective. A drop from $51 to $49 doesn’t look so bad if you look back and see that it’s been between $52 and $48 for the past six weeks, or if you see that your stock rose from $40 to $51 in the previous two weeks and the “drop” to $49 is meaningless. (The problem with graphs that your computer makes is that a move from $10.00 to $10.05 will fill the whole space if that’s the whole move for the day or week. There’s no fixed scale.) Mark on the graph where you made purchases.
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Peter Lynch suggested a monthly graph of stock price against trailing earnings on a log scale map, which I have found very helpful. I scale it so that if the stock is twenty times trailing earnings the price and the earnings graphs will overlap. That gives you a quick visual perspective of whether the stock is cheap, reasonably priced, or wildly priced, and also give a nice visual of how fast earnings are growing that you can compare with your other stocks, as you use the same scale for all of them.
Hope this helps
Saul