Hi everyone,
It’s a busy season for all of us but please bear with me, I think this is important to new people here - new to Saul’s board or to investing altogether. So feel free, of course, to just skip this thread.
By accident I ran across an older post that I didn’t have time to respond to earlier and would like to respond belatedly. My hope is that the original poster will have a better chance to find it in a new thread.
http://discussion.fool.com/dip-question-32980776.aspx?sort=whole…
New to this board …
I am in the process of building out a more concentrated portfolio. So, I need to buy and sell quite a bit. I assume it is better to buy in stages as opposed to plunking it all down at once among different stocks? I have starter positions in a small number of stocks that will help me concentrate. When should I buy second and third positions? Any ideas? Also, with recent market downturn and accompanying dips in stock prices, how might I determine those next buys? Do I look at 52 week high and when the stock hits 15 or 20 percent off that figure, then should I buy? Pay no attention to prices and just buy? Look at past 6 month h8ghs and when a percent off then buy?
Dear Newb,
If you don’t mind, I wonder if you are amenable to alternate advice. I’m sorry, but I think you’re possibly headed for trouble. My belief comes from my own experience and from so many others. We’ve all walked in Nikes just like yours. But feel free, of course, to ignore my advice or skip it altogether. After all, I am not famous and do not run a hedge fund.
Also, I’m not an expert at port construction so be wary of any advice given here. But I slept in a RaptorNest last night and remember what it was like to have been a newb. It has been a while, but I certainly remember numerous questions I had and didn’t know where to look for the answers. So in the spirit of helping a fellow (beginning) investor, I offer some simple ideas for you to consider. I can’t guarantee they are the best ideas. But if you were to follow them closely, I would feel safe saying that you will be a much better investor, with more confidence and surety about your direction than most other methods including the famous “What should I buy?” and “When?” methods. I think you would quickly gain the confidence to weather all the weird things the market doles out continuously. Alternatively, if you feel a strong need to to buy something now, anything, by all means, proceed. But know that I strongly suspect your satisfaction to be as low as your first-year returns—just like most of us experienced when we started. I would like to save you some pain.
On Starting The Process
If you have to buy a stock now just to know that your “Buy” button actually works, consider something you know about. What’s your field of expertise? Job? Location? Relatives in industries? Friends in banking? Study first before buying anything. If you feel you must “get going” now, buy an index fund. I would recommend an equal-weight index fund from Vanguard, who has the lowest fees and best reputation around. When you get close to being ready to buy your first stock, sell something that needs selling at least a few weeks ahead of time. Planning pays off.
First Things First.
• Slow down.
• Your concern about when to buy needs to be tempered with information. The first question you should answer is not when to buy, but what to buy, if anything.
• Forget timing the markets and for now, even timing individual stock prices.
• Make the conscious decision to take no action without being able to write a brief sentence or paragraph stating why you are taking the action.
• Write them down! The brief time spent will save you untold thousands of dollars in losses and disappointment later. It will give you evidence to come back to when you wonder why you sold XYZ or passed on ABC back when
On Learning
• Take your time. I know you are in a hurry to get going, you want to win the game, but its much healthier to be alive for the next game. Been there, done that, learned the hard way. (We all have!)
• Read, read, read. Can’t say enough about the benefits. It is a requirement, not optional.
• Can’t say enough about the benefits of following Rule#1 either. Never Lose Money.*
• Study basic accounting. We don’t need to be experts, although it wouldn’t hurt. 
Go to an investing website that covers the basics, or somewhere with a broader view, something like the Khan academy.
• Convert some form of financial statements to spreadsheet format and play with them. Calculate the percentage changes from quarter to quarter, year to year and decade to decade. Learn to follow the trends and how they affect a company’s financial success!
• Since this will drive you crazy while the market zooms (ha, you don’t know if that’s going to be zooming up or down though!) you need to realize that every day spent here will come back with a value of multiples later. Not to mention all the huge losses you will have avoided (You will lose sometimes, no matter how expert you become in investing.*)
• Make some investing rules for yourself. Write them down. Doing this will bring unimaginable peace and satisfaction in the future. Or, skip this step at tremendous cost and regret. Some examples follow:
o I will attempt to answer all my default (and specific) questions about a prospective investment before considering buying.
o All investments must meet a majority of my default requirements before buying.
o I will never buy or sell sell an investment based on price alone.
o I will add to an investment if ……blah, blah, blah …… when …… blah, blah, blah.
o I will sell an investment only when …… blah, blah, blah.
o Blah, blah, blah
On Port Building (finally, phew!)
• Start with a company you know. If you love Charmin toilet tissue, find out who makes it, where it comes from, who owns the trees, who are their competitors, who runs the place, their history, their finances, their public announcements, their conference call transcripts or recordings. Study them deeply until you know with little doubt whether they are the best of breed, and also-run, or something in between. Be confident.
• Make a list (template?) of questions you would want to know about a business before you bought the whole business. Keep your answers short and be honest. If you don’t know the answer, leave it until you do, if that’s even possible.
• Repeat with more companies that you are interested in. Do not think about the stock or its price at all. Harder to do than it sounds, but once again, the habit will pay you back for your diligence many times over.
• Keep a detailed list of the companies you explore along with your findings. Include links to articles, tables, etc.
• Buy your first stock from among these companies when you find a company that “you MUST OWN”. Unless it is highly cyclical or in an industry under fire from …something, there are so many causes of fire…pay little attention to price.
• Don’t pass up alternative investments. (e.g., If you run into a great local company, for example, find out more about it. Talk to management. Maybe an investment is possible whether they are public or private.)
• Become an expert in … something, something that both interests you and has capability to be profitable. Study it, talk to practitioners, join a club, find out whatever you can about your subject.
• Follow the company(ies) failthfully. The timing is up to you. Whether daily, weekly, monthly or quarterly (no longer, I recommend) make it a habit. Learn how the company(ies) react to news, both good and bad. Learn about management. Would you want them running your firm? Handling your money? Dating your sister? All these things are what leads to the most important thing about investing in a stock—conviction. With conviction, every move you make will be made with reason and confidence. Without conviction, every move you make will be made with great uncertainty and at the whim of something or someone else other than your own knowledge.
• Start with positions tied to your level of conviction. Like the company, not sure about the future? Conviction 5/10? Buy half a position.
• Add to positions when your conviction level rises.
• Sell a position when your conviction level falls to a pre-determined level. Learn from it, but No second guessing allowed and always, No Regrets.
• Learn all you need to be able to assign a level of conviction to an investing candidate. Can’t decide? Can’t invest!
• Never buy or sell an investment for which you have an unknown or undecided level of conviction.
• Never buy or sell an investment that is not tied to your level of conviction.
There, that should be enough to get you started. If it sounds hard, consider:
• If it were easy, everyone would do it
• The market has winners and losers—always.
• Make the odds work in your favor. Always aim to be a winner.
• Always aim to win. Never settle for average. (The average investor loses to the S&P 500 index!)
I’m sure to have forgotten many things. Learning to invest is an involved process and newbs are bait. But in a nutshell, this is an outline of my best advice for you. I trust you realize I can’t guarantee results. But I will tell you this—I am 100% convinced that if you follow the general ideas here, and write stuff down, you will be likely to gain a satisfying and profitable lifetime of investing. My conviction level is 9.8, higher than I’ve ever given a single investment. And you know how important is Conviction.
And if you don’t like my advice? No problem. Alternatively, you could study ANET, Or just buy $1000 worth and study it at your leisure with skin in the game. No guarantee, but I do eat my own cooking, and lots of it.
Good luck all,
Dan
*Never Lose Money: does not mean that you should never sell an investment at a loss, we all have to at times. We can also have bad months, bad years even. Everyone does. Read about the cream of the crop, hedge fund managers, for evidence—any of them. No, Never Lose Money means you should never start an investment with the idea of “win some, lose some” which is a good philosophy for buying less-than-the best investments, and to … Lose Money. Put the odds in your favor the only legal way I know—-gain more knowledge than the next guy. (‘Tis better to buy an index fund and spend time doing something you love. than working hard investing only to lose money.)