Howdy everyone! I hope this mail finds you in excellent health and your investment portfolio in shipshape condition.

I have been on an extended break and I feel like a poor man with new shoes. Hopefully you are ready to take on the world of investment with me once again. By the look of things, nobody wants to venture anywhere in these markets on their own these days, especially not while everyone still has tech-stock pneumonia. There is safety in numbers, hmmmm?

It is best that you disregard that last statement because crowd-like behaviour is exactly what one tries to avoid in the investment world. THE BANKER and I decided to get back to basics with this series. In these wild and unpredictable times we sensed a need for that. About a century ago, when I was riding the trails of the Wild, Wild West (before Will Smith), I had this little ritual I performed when I got scared.

I would dismount and do the checks:

Girdle - check

Stirrups - check

Bridle - check

Water - check

Rifle - check

6-shooter - check

Extra ammo - check

Head - check

Body - check

After that I would get on with it. Although it did not tell me what lay ahead of me on the dark trail, at least I was reassured that I had packed the right equipment. I knew who I was, where I was going and that I had the right equipment to get me there. Today, I have a different job, I'm on a different trail and the equipment is different but the mission is still the same. How do I ensure that I get where I want to be? Luckily, I have a Buffet six-shooter and a Graham rifle to help me on my way. So if, like me, you are an investor that wishes to ensure proper returns, join me in doing a bit of soul searching.

In this series we are simply going to be asking:

Who are we?

Where are we going?

Did we pack the right equipment?

The most basic and unavoidable step in managing your portfolio is to decide whether you are an INVESTOR or a SPECULATOR.

An investment operation is one which, upon thorough analysis, promises safety of principle and a satisfactory return. Operations not meeting these requirements are speculative.

-Benjamin Graham

The knocked down version,

Rule No 1: Never Lose Money

Rule No 2: Never forget Rule No 1.

-Warren E Buffett

Or the way that I like it,

If it ain't safer than the bank, the money ain't leaving the bank.

-Mr B

Keep the money safe because it is very hard to invest without any money. It is just as hard to regain your capital once you have lost it. As I don't like seeing grownups cry, I keep on asking them, "Are you investing or speculating?" It is worrying how many folks DON'T KNOW THE DIFFERENCE! If you go for high-flying, hot stocks you are speculating. Despite what the investment banks told you, those Internet stocks that had growth forecasts of 250% p.a. were speculative purchases. If you are buying stocks on margin (i.e. with borrowed money) you are speculating. Graham stated in The Intelligent Investor;

"In our conservative view every non-professional who operates on margin should recognize that he is ipso facto speculating, and it is his broker's duty so to advise him."

Speculation is not necessarily unintelligent.

It can be intelligent if you don't mistake it for investment.

It can be intelligent if you do it for a hobby rather than seriously.

It can be even intelligent if you do it seriously - but then you'd better ensure that you have the proper knowledge and spend the required time to do it properly. That means it cannot be anything short of doing it full time and, if you want my advice, don't do it with your own money. It can be intelligent only if you risk money that you can afford to lose (that means NOT using the kids' college fund).

It can ONLY be intelligent if you adhere to all the above.

However, as we are investing our own hard-earned cash, we will stick to investment and especially to intelligent investment. When we invest we are simply buying future cash flows at a discount. It is as simple as buying $1 (today's value) of future cash flows for 50 cents today. In the world of investment the $1 we bought above comes in the form of a business. The art of investment lies in figuring out that the business is worth $1 when everybody else is selling it for 50 cents. And that is that. I hate to break it to you, but this is the bottom line of investment. However, do not be so easily deceived. As the great man himself said in the same vein, The principle is sound, its successful application is not impossible, but it is distinctly not an easy art to master.

Now don't despair, as it is easy enough to attain a mediocre result. On the other hand, if you are shooting for an above average result you will need to bring long hours, more than a fleeting passion and more than a trace of wisdom to the table. Oh, and let's not forget discipline. You'd better stick to your guns.

It is the same story as a century ago. You must pack the right equipment, trust it and stick with it. It is the only hope you have to make it alive (and solvent!) to the other side. If you think my last sentence is a bit dramatic then I take it that you haven't been in this game very long. A protracted bear market should quickly quieten those that accuse me of melodrama!

Philip Fischer used a very simple but potent test to whether trading activity was for investment or speculative purposes. So tell me, generally speaking, how well do you sleep at night? Or rather, do your investments keep you awake at night? If the answer is yes it is highly likely that you are engaging in speculative activity and placing your life's savings or your kids education at risk. Of course, you could simply be sleeping well because you are a trust fund baby who inherited so much money that you cannot possibly blow it all in one lifetime - even with your appetite for fast stocks, fast cars, even faster woman and the lack of IQ that accompanies the above. Unfortunately, the best most of us can hope for is to make our children trust fund babies! If you sleep well at night it is most likely that you are an investor. Your investments may give you the occasional nightmare but they shouldn't turn you into an insomniac.

So, if you want to learn about the way I view the world of investment, please join me in this series to see whether we can make it to the town at the end of the trail and a nice cold beer at the Last Chance Saloon.

Happy trails!

Whatever you are up to, I hope it is profitable and ethical!

Mr. B

mail_mrb@yahoo.com

Posted: 2002/09/10 08:11 View Archive