Tuesday, April 17, 2007

The Boston Marathon & Investing

"This sport is the sport to see what you are made of, so use those expert's advice, but be free to be your own champion runner, picking and choosing advice you enjoy and that works best for you. " Bill Rodgers

Since today is "Marathon Monday" here in Massachusetts and also "Patriot's Day", I thought I would weave them together with investing. The quote above, taken from Bill Rodgers, a 4-time winner of the Boston Marathon, I think is perfectly suited for investors.

There are a million different books on how to make money and just as many on how to do it in stocks. What do you do? Who do you listen to? What style should you use? You must answer these question before you invest a dime. In this example I will use myself to try to illustrate my point.

"Never let any guru spoil your fun!" Bill Rodgers
The is no "one way" to success in investing. Warren Buffet did it with value investing, Boone Pickens did it in oil, Bill Gates in tech, Eddie Lampert, retail. The point here is that there are many ways to skin this cat and do not let any "guru" tell you there is only one way to do it and that your way is wrong. There probably is only one way for "you" to do it and that my be very different from me or the person living next door to you. The style you choose must fit your personality, otherwise you spend your whole investing life fighting yourself. What do I mean? If you are a big risk taker who needs constant action, being a value investor and rarely making a trade will probably lead to you jumping out of your skin as you see the day to day market action happening and you are not participating. You will be constantly itching to trade and fighting back the urge. Then, when you cannot contain it anymore, you will leap at a trade and probably end up making a mistake because you will be trading just to trade to satisfy the urge, not necessarily because it is a good trade.

I am two thing (among others). Stubborn and patient. Fortunately those traits are perfectly suited for my investing style of value investing. I need to be patient as it may take months or years for the full value of a pick of mine to be realized. I need to remain stubborn and have the courage of my convictions while those without patience bail from the stock as the talking heads on TV trash it day after day. If I am right, I will be richly rewarded for both traits. Remember, you are never "right or "wrong" on a pick because someone says you are. You are right or wrong because in the end, you are.

"My whole feeling in terms of racing is that you have to be very bold. You sometimes have to be aggressive and gamble." Bill Rodgers
While I am patient, I do require a little excitement in my portfolio. Now, my definition of this is probably much different that yours and that is ok because the key here is to find your level and stay within it. In order to get my "excitement fix", I engage in the selling of puts in my portfolio. This gives me a short term trade (usually less than a month) and a little "action". Many people are laughing at this saying to themselves "that is what he calls action?" For me, yes it is. Because I do this and do not extend myself into day trading which I just am not genetically wired to do with any consistent profit, I am very successful in this area. I usually end up netting $200-$600 a month selling these puts. Now, for me to be successful at this, I do it a certain way. Read about it here

The key here again is to find what works for you and do it, not to try to do what someone else does especially if what they do just goes against your very nature.

"One key to success is not to make your diet too complicated". Bill Rodgers
One mistake too many investors make (myself included in the past) is to try and be a little bit of everything. There a millions of ways to invest and many people are good at them and make tons of money with them. Very few are good at many of them. There is nothing wrong with finding a single style and sticking with it so that you become very proficient at it. The is more money to be made at excelling at a single style than being ok at a few of them. The more you complicate your strategy with different styles, the easier it then becomes to blend them together and water them down. For instance, value investing and growth investing do not really mesh. In many ways, they are polar opposites. If you were to try and do both, what would most likely end up happening is you would end up with a portfolio that is a little of both (not really true value or a growth stocks) and in the end, realize the return of neither strategy. I am a value investor, everything I do stems from that. I do not understand tech (can't analyze it with accuracy) so I avoid investing in it. That is not to say tech is bad, or that you cannot make money there, it is just not for me and to be honest, I do just fine without it. If I am really successful without names like Apple (AAPL), Google (GOOG) or Microsoft (MSFT) in my portfolio, why should I add them just because someone says "you have to have tech in your portfolio". That is nonsense. One thing to keep in mind is there are about 15,000 stocks, bonds and funds you can buy, there is money to be made everywhere. If you do not get it, avoid it, you can make money somewhere else. Never buy a stock because someone says "you must diversify in tech" (or whatever investment they say you "need").

"Always take the long term view and train and race smart, with a bit of caution." Bill Rodgers
Long Term
I have said it before but I think it cannot be emphasized enough, the shorter your time frame, the more risk you assume. Taking a long term view towards your investment
s will enable you to avoid angst from the short term ups and downs that the market will inevitably throw at you. The longer your view, the less important weekly or quarterly results become to you. You will instead be focused on the big picture and the business fundamentals, which is what is the most important thing.

Train Smart
Charlie Munger, Warren Buffet's partner, has always said that those who are the most successful investors are always reading. He says people should read whatever they can get their hands on and read in a wide variety of subjects. The wider the field of knowledge you have, the wider you then cast your investment competency net.

As you become successful as an investor and accumulate more assets, there will be a urge to become enthralled with your success and assume it will be the "way it is". You then will be inclined to make larger bets on new positions assuming your success will naturally continue. Be careful about this as nobody is right all the time. Exercise the caution Rodgers calls for above and remember how you got to where you are and watch the urge to "over reach". This way, if you are wrong (everybody is eventually), the pain will not be so bad. You want to avoid the sickening feeling of wiping out years of profits in one bad investment.

If you take the advice Mr. Rodgers gives above, you are at least heading it the right direction. I wonder if he knew he was an investing adviser.....


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