John:
re: my approach.
You ask some hard questions. If I was going to answer them thoroughly, in an organized fashion, I'd probably never get around to it. So I'll just write whatever comes into my head, and apologize in advance for the stream-of-consciousness rambling.
Have you read:
Message 16240102
Message 16240237
Generally, I use Gorilla Game principles to choose companies, but 2 of the 8 stocks in my portfolio are UnGorillas: CCL (Carnival Cruises) and CMH (mobile home builder). Other parts of the Gorilla Game, especially the parts dissing valuation, are dangerous and wrong.
If anyone could reduce successful investing to math, a checklist, a science, then (by definition) the method would be reproducible by others. By a process of Darwinian Selection, all investors would eventually be equally excellent, and no one could outperform an index fund. Since this is manifestly not true, then investing success must be due to something else.
Having watched my fellow investors closely, since I started looking at the stock market in 1995, I have eventually come to the conclusion that we are hardwired to do counterproductive behaviors. That is, in our genes, in the connections of our neurons, we are programmed and built to do things that helped us survive on the African Savanna 2 million years ago, but are counterproductive for investors today.
Specifically:
1. We are herd animals. It is intensely uncomfortable for us to be moving opposite to the movement of those around us. If we make a mistake and lose money, but everyone else around us made the same mistake (like believing forward earnings estimates last year), then we don't feel that bad. Everyone was an idiot then, so it's OK. On the other hand, if we took a stand alone, and are proven wrong, the herd will heap abuse on our heads, and we will feel like we made a huge and unforgivable mistake. Even if the two mistakes are, objectively (= $ lost) the same. In April 2000, it felt right to be buying CSCO. Today, it feels right to be in cash or bonds. It feels right, mainly because that's where the herd is moving.
The way to reduce herd behavior is:
A. recognise it, especially in yourself
B. have a plan, a set of guidelines, and stick to it. Change them only when the basic underlying conditions change.
C. There are objective, measurable, consistent warning signs to tell you when the herd is heading in the wrong direction. Net redemptions from stock mutual funds should be used as a buy signal, the best one, IMO. Euphoria, in the business press, on these boards, and on CNBC, should be used as a sell signal. Hitting the upper and lower ends of long-term valuation ranges, should be used (respectively) as sell and buy signals. That's a harder one to use, as you have to pick a valuation metric(s) (P/S?, P/CF?, P/B?, P/E?, and which flavor of E?), and then decide what period to use in deciding the range (last 5 years? last 100 years?). So, I think it is possible to time the market, and there are specific numerical objective criteria to do this. And it takes mainly courage, not brains or long study.
2. We oscillate between extremes of euphoria and pessimism. Whether you look at executives making capex decisions, or investors lending money for a capacity buildout, or investors buying stocks, or consumers going from oversaving to overspending and back, there is this permanent gyration. We never are in equilibrium. It seems we can't be. Which presents opportunity to those who can keep their head and act logically.
3. We never learn from experience. The mistakes made recently in the telecom buildout, are precisely and exactly, the same mistakes made during the railroad buildout in the mid-late 1800s. The cast of characters for these farces are the same. Only the names and details change. "Two rust streaks on the prairie" = today's "dark fiber".
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I use TA only for the fine detail, to pick the exact buy-points once FA tells me I am in range. And, recently, watching Cary has led me to simplify this, and just buy (or sell) in equal increments within a range. I once read a 600+ page book on TA, and I've forgotten or discarded 98% of it. Now, I just use the simplest TA (moving averages, resistance/support/trend-lines, channels).
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Re: CSCO, JNPR: Cisco is an incumbent Gorilla. I don't see that JNPR has any discontinuous innovation. Therefore, the presumption should be that CSCO will maintain their dominant status, and collect most of the profits available in their sector (longterm, I mean; at the moment there are not much profits available to anyone). CSCO has faced similar challenges in the past, and has an excellent track record of fending them off. I'm not competent to judge the technology, I am mainly depending on CSCO's track record of success, and incumbent position. One problem with this, is that Cisco's previous success was dependant on buying their pipeline. New products (gross generalization) were not generated internally. That method of generating products, in turn, was dependant on a high stock valuation. It remains to be seen whether they can do this, if the stock goes and stays in a PE range that is not unreasonably high (30-50?, 15-25?). At the moment, I hold neither. When I get back into the sector, I will revisit this question. I may do what I did in storage, and buy two stocks in the sector, if it's not clear to me who the winner will be.
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I've had a lucky streak lately, so people are telling me I'm a genius. I've done some huge mistakes in the past, and I'm sure I will again, repeatedly. The consistent errors I am prone to are:
1. selling too early
2. making overaggressive bets on one stock
3. trying to pick exact bottoms and tops
4. rudely dismissing other's viewpoints
5-25. errors I won't admit to or don't know about |
