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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: Paul Senior who wrote (13378)	11/27/2001 8:25:55 AM
From: Mark Marcellus	Respond to of 78476

Do you follow Mr. Lynch's recommendations as to having only a few well-considered stocks? If so, has that worked out satisfactorily for you? I'm constantly working on improving the "well-considered" part, but yes I do. I try to hold no more than 10-15 stocks, and I doubt that I've ever owned more than 20 at one time. Although I'm no superstar, I'm happy with my results. Of course, one of the problems with a focused portfolio is that my results don't prove much of anything. As the EMT folks would be quick to point out, lack of diversification increases volatility, which in turn increases risk (as they define it). This means that spectacular results, much better than mine, are to be expected in some individual cases, but that these prove nothing. I don't agree with most of EMT, but I do agree with the part about my results proving nothing. I should also add that I'm not a strict Lynch follower, although I've read both One Up On Wall Street and Beating the Street. One Up was the book that, in 1989, gave me the courage to buy Microsoft, ignoring my idiot broker's advice against it. After that I never looked back. Over the years though, I've developed a style which is more in line with Warren Buffett than Peter Lynch. Although there is certainly a lot of overlap in their philosophies, Buffett is a much stronger proponent of buying and holding stocks for the long term, whereas Lynch's style tends toward more turnover in the portfolio. FWIW, there's a guy who hangs out on TMF who has read both Lynch books hundreds of times and strictly adheres to Lynch's methods. He currently reports that his annualized returns since 1993 are about 29%, and he is apparently able to back up that claim. My own philosophy vis a vis focused investing is best summed up in Warren Buffet's 1996 letter to shareholders: Should you choose, however, to construct your own portfolio, there are a few thoughts worth remembering. Intelligent investing is not complex, though that is far from saying that it is easy. What an investor needs is the ability to correctly evaluate selected businesses. Note that word "selected": You don't have to be an expert on every company, or even many. You only have to be able to evaluate companies within your circle of competence. The size of that circle is not very important; knowing its boundaries, however, is vital. To invest successfully, you need not understand beta, efficient markets, modern portfolio theory, option pricing or emerging markets. You may, in fact, be better off knowing nothing of these. That, of course, is not the prevailing view at most business schools, whose finance curriculum tends to be dominated by such subjects. In our view, though, investment students need only two well-taught courses - How to Value a Business, and How to Think About Market Prices. Your goal as an investor should simply be to purchase, at a rational price, a part interest in an easily-understandable business whose earnings are virtually certain to be materially higher five, ten and twenty years from now. Over time, you will find only a few companies that meet these standards - so when you see one that qualifies, you should buy a meaningful amount of stock. You must also resist the temptation to stray from your guidelines: If you aren't willing to own a stock for ten years, don't even think about owning it for ten minutes. Put together a portfolio of companies whose aggregate earnings march upward over the years, and so also will the portfolio's market value.