Investing Principles
Published:Wednesday | August 24, 2011 | 12:00 AM
- Prepare for the situation to proceed faster than you think
Most deteriorating businesses will do so faster than you anticipate. Be very wary of value traps, or companies that look cheap but are generating little or no economic value. On the other hand, strong businesses with solid competitive advantages will often exceed your expectations. Have a very wide margin of safety with a troubled business, but do not be afraid to have a much smaller margin of safety for a wonderful business with a shareholder-friendly management team.
Expect surprises to repeat
The first big positive surprise from a company is unlikely to be the last. Ditto the first big negative surprise. Remember the "cockroach theory." Namely, the first cockroach you see is probably not the only one around; there are likely scores more that you can't see.
Don't be stubborn
David St Hubbins memorably said in the movie This is Spinal Tap: "It's such a fine line between stupid and clever."
In investing, the line between being patient and being stubborn is even finer, unfortunately.
Patience comes from watching companies rather than stock prices, and letting your investment theses play out. If a stock you recently bought has fallen, but nothing has changed with the company, patience will likely pay off.
However, if you find yourself constantly discounting bad news or downplaying the importance of deteriorating financials, you might be crossing that fine line into stubborn territory. Being stubborn in investing can be expensive.
Always ask yourself, "What is this business worth now? If I didn't already own it, would I buy it today?" Honestly and correctly answering these questions will not only help you be patient when patience is needed, but it will also greatly help you with your selling decisions.