In my investment career one of the most difficult things to master was/is to practice what I preach. For some reason I have found that, although I instinctively know what the right course of action is in a particular investment situation, I will frequently want to do the exact opposite. In fact, I will go as far as saying that I have found it easy to grasp the basics of value investment, economics, accounting, etc. Sound business principles come easy to me. However, I find that my main and ongoing battle is to do what is right - and not what other people tell me to do. I will give you a simple example.

When I read a newspaper I, just like everybody else, scan the articles and only read the ones of importance. I simply do not have the time to read the whole paper. Frequently, I read an article about a company, which I know will never fly in terms of sound business principles. However, it sounds like a new thing or it sounds that there might be a quick buck to be made. So I read the article on the assumption that the company under discussion might be a new investment proposition. However, 99% of the time it does not work out as planned. Therefore, in 99% of the cases I am wasting very precious research time. Despite knowing that I will be wasting my time in 99% of cases, I still go ahead and do it. Over the years I have greatly reduced that wasted time, but I still catch myself doing it every now and again. That 'every now and again' still adds up to a substantial amount of wasted time over a lifetime, particularly if you plan to live as long as I do (Now don't we all).

When it comes to selecting articles in the daily news flow I always apply the selection criteria of wanting to know more about less. I have to stick to certain industries. I cannot know everything about every industry, and neither can you. This is particularly the case if you are also constrained by an average IQ. Warren Buffett would very likely recommend that you stay within your circle of competence. Ensure that you first get a good chew on whatever you have bitten off before you stuff your face with even more. Let's call that the McDonalds' take on things.

Another area where this manifests itself is in portfolio selection. Currently, there are only 9 companies in my portfolio. Yet, the concentration risk is mitigated because three of them are holding companies. The risk is diluted because the subsidiaries are spread out over various industries. For me it is important to think more like a collector than an investor when it comes to adding a new company/ artefact to my collection. Obviously, I put a company through the critically important research process but many will argue that the final test has little to do with investment criteria. I will ask questions like the following:

-Is this a masterpiece?

-Will this piece/company stand the test of time?

-Will I be a proud owner?

-Will I be proud to be associated with the artist(s)?

-And, very importantly, how will this piece match up to the other pieces in my collection?

The last point is worth noting and I have found it very useful over time. Regularly a company will get to the very last stage of the research process and then I will not invest, simply because it does just not match up to the other businesses in my portfolio. If a company is to be considered for investment then it has to improve, or at least match up, to the average quality of the companies in my portfolio. However, I have found it very difficult to spend all that time researching a company and then throw it out at the very last stage. It is important to always remind myself that investment returns are not determined by the time spent on research but by what that research tells me. This is similar to what Benjamin Graham said, which was along the lines of it only being the facts that make you right.

The issue at hand is that I have to stick to what I know is right. If, at the final hurdle or (for that matter) at any stage of the research process, the facts clearly point the other way you should not invest. If there is a red flag hoisted above the investment right from the start then don't even waste your time, despite what the media or market may say. If you cannot find anything to research then go to the movies, take an extended lunch or find something else useful to do with your time and money. I have found that I end up with considerably more time on my hands if I stick to what I know is right. I have actually had the panic-stricken realisation that I have nothing to do. For a workaholic, that realisation probably equates to a 'Lady of the Night' arriving for an appointment and discovering that the client only wants to talk.

I wish to conclude with the following two quotes, which I believe can be attributed Philip Fischer (I would appreciate it if someone could verify whether it was Fischer). Anyway, he said, 'I can't do a year's work in 12 months, but I can do it in 9'. He also said, 'Staring into empty space, is not wasted time'. Try to do less wasteful things by throwing out all of those that are half-right. Think more about what you do and especially whether what you are about to do is the right thing. Ensure that what goes on in your head actually translates into what goes on in your portfolio.

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

Mr. B

Mail_mrb@yahoo.com

Posted: 2002/09/23 08:36 View Archive