On Paul's note, I think it was Graham, or it may have been Buffett paraphrasing Graham who said there are two rules in investing. The first rule is not to lose your principal. And the second rule is don't forget the first rule. Virtually everybody today, including value investors and especially insitutional value investors has forgotten both rules. Institutional value investors are chasing the index whatever it takes because that is what their clients tell us they want. I hear the ghost of Ben Graham whispering to me "What are those clients going to be telling you when you lose 40% of their principal and your only answer is 'Come on, the S+P is down 42%. I thought you wanted us to try to beat that'? The moral of this story is that virtually every institutional investor, including value investors, have forgotten that the S&P can go down. You would not believe the pressure institutional value investors are under right now to "perform".
Picking stocks is about finance, accounting and economics...and psychology. Nobody will ever capture that psychology better than Ben Graham - the market is a constant battle between fear and greed. Obviously greed has been winning over the last few years, but all of a sudden it seems we have some fear. Or do we? Look at Dell and the internet stocks and it seems to me that greed is still dominant for a large segment of investors. If the gains in the market are predominantly from insanely valued stocks like Dell, Coke, Microsoft, GE and the like, is that really relevant to me. If I see the disaster ahead, what do I care if I am six months early in selling? That is a real danger for institutional investors, who may get the last laugh, but have no clients left. But individual investors don't have to play that game, which gives individual investors a real advantage. (I know of what I speak because I am an institutional investor who also invests individually.) I'm with Paul. If you own a company which you are willing to, and will, hold for 5 years that is virtually certain to make a more than fair return even if the market drops to normal levels, what are you worried about? Buffett says buy a stock as if there is no such thing as a stock market - would you be willing to own this business forever if there were no stock market? But if the reason you're worried is that you think your stocks are only cheap relative to other stocks, you've got a problem.
Sorry for the long post. I hope it was worth the length.
Jim |
