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meganchip (53.84)

meganchip's CAPS Blog

Guaranteed to lose money - idiot investor & Graham

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November 14, 2009 – Comments (15)

I want to take a second to thank those of you who recommended I read The Intelligent Investor.

Before I go on I need to confess that a) I haven't finished it, b) I barely understand parts of it on the first read c) I cheated and bought an abridged audio version (thanks AAPL) as well as the book in an attempt to better understand it and d) the paperback version I got has extensive commentary some of which I understand better than the actual book.

This all further just confirms my status as an idiot but despite all of this I've picked up a few gems of knowledge that have really been helpful so thanks!

First, and probably most important of all, I've come to the zen-like realization that if you buy stocks you will lose money. Some days, weeks, months, years they go up. Some days, weeks, months, years they go down. On any given day you might lose money. While you can take steps to minimize its impact, unlike an FDIC insured savings account, it's guaranteed.

That's just how it is.

As simple as this concept is, it's probably the key to it all. Put another way... this could best be described as a motto I rely on in my work: "don't panic".

I'm fascinated at how many people I know who are completely terrified of losing money even on just one day's move. I've been looking for friends in my life who might be interested in investing. Maybe having someone to bounce ideas off, you know?

Yeah. Not happening. Friends are completely uninterested in anything where there is a risk of losing any kind of money in any way shape or form, even though the potential for gains are greater. The closest I get is people who might have some dollars in a few mutual funds. I would like to think I have a relatively normal and average group of friends.

Now it's not like I'm some hotshot, cowboy, rebel speculator luring my friends into risky gambles. I just have decided to buy stocks rather than put money under my mattress.

I was originally more of a "buy and hold it and don't look at it 'cause you can't handle the truth" sort of investor based on the pretty standard advice given to ordinary people like me by financial advisor types. Now I'm more of a "study hard, buy and hold and pay close attention but don't wet your pants in fear" type of investor. ((Personally I would love to think that some day there could be an investing style called "don't wet your pants"))

There's a certain part of my portfolio that is for speculating (and it's doing pretty poorly in the short term). But while I'm finding that both are fun, my friends are not in the least bit interested. So I will continue to blog my thoughts here. Hope there are others here in the same boat, getting started, looking for answers ...

Next things on my list to figure out: bonds --- options --- and --- why I hate mutual funds so much.

15 Comments – Post Your Own

#1) On November 14, 2009 at 9:47 PM, msftgev (96.83) wrote:

Sounds like your on the right track. Warren Buffet just mentioned that his best advice came from Ch 8 and 11.

Also I hope you patent and market the don't wet your pants investing strategy. You'll make a fortune.

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#2) On November 14, 2009 at 9:48 PM, bullishbabo (100.00) wrote:

Pay special attention to Chapters 8 and 20: market fluctuations and margin of safety.

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#3) On November 14, 2009 at 10:02 PM, ChrisGraley (99.77) wrote:

I re-read it periodically and get something new out of it every time.

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#4) On November 14, 2009 at 10:28 PM, ReadEmAnWeep (< 20) wrote:

Ya, that book would be a very good start on your way to better investing. I am just starting, just like you. I am also in the same predicament where I don't have any friends interested in investing. So I am doomed to learn less quickly compared to those who have friends and mentors in this area.

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#5) On November 14, 2009 at 11:17 PM, Teacherman1 (89.36) wrote:

I just took a look at your Picks again, and decided to add HWCC to my Watch list. It looks like it is getting closer to a real buy price.

Don't know it you actually bought it, or just picked it, but if you bought it, you won't lose in the longer run, but it was a little overpriced at that time.

Remember, use you strength to make your decisions.

The reading will help, but I think you already know how to analyze a company to look at potential growth.

If you start by analyzing the down side, you will not be likely to lose money in the longer run, just may not make as much on the upside if you pay too much, but that is an opportunity loss, and the cheapest kind to have.

Good luck on your continued search.

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#6) On November 15, 2009 at 12:17 AM, meganchip (53.84) wrote:

Hey Teacherman - I am buying HWCC. I dollar cost average so if I decide to buy, I start with a very small buy to keep my eye on it. Then I buy weekly - more, less or none - depending on the price moves until I get to my planned total amount. If a price starts to rocket up, I can hang back and wait. (I use automatic investments to keep my trade costs way down. It doesn't allow me to make moment by moment decisions but it keeps the cost low and it allows me to use my small purchase method.)

Each week I review all of my picks to figure out where to put that week's money. Right now I'm only at 5% of my intended HWCC purchase but I'm lovin' the price drops! ;-)

As for the CAPS thing... I'm not sure I even understand how the scoring works. I've decided it's a better use of my energy to figure out what to do with the real money rather than how to play with picks!

Reademanweep - My only friend (and mentor in business) who watches the market like I do is a market timer using strictly ETF's!!! It's like were on different planets!

... Chapter 8 chapter 8 chapter 8 ... must memorize chapter 8 ... and 11

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#7) On November 15, 2009 at 7:39 AM, bullishbabo (100.00) wrote:

Check out chapter 20 too! Buffett's mentioned that one a LOT in the past.

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#8) On November 15, 2009 at 7:46 AM, bullishbabo (100.00) wrote:

Also, don't feel bad about not getting it all the first time. I read it a second time recently and I still learned quite a lot. I'll probably read it a 3rd time in a year or two.

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#9) On November 15, 2009 at 11:38 AM, Teacherman1 (89.36) wrote:

Just wanted to share my thinking on HWCC. Remember, it is worth exactly what I am charging for it.

Been around since 1975 and first went public in 1987. Was bought out by Alltel in 1989. Was then bought again by a private investment group. Went public again in 2006 with IPO price of $13.00. Pays a dividend of $0.34 annual, currently.

Seem to go from cash to receivables to cash every 90 days.

Good balance sheet currently.

Very dependent on price of copper.

Has room to grow and has been as high as mid $20's.

Not as much upside at current price $10.79 as I would like, but if it gets down to the $9.00 range, will probably buy some.

Too many still available with more potential upside right now. Of course, being greedy can get one in trouble.

As economy improves, sales, profits and dividend should pick up.

If bought at right price and dividend goes back up and stays, could be a good combination price appreciation and dividend yield play.

Will watch. Report this comment

#10) On November 15, 2009 at 5:28 PM, caterpillar10 (68.30) wrote:

You may be able to find live people that meet locally on meetup.com. I used to go to an IBD reader group in Phoenix yrs. ago. It was ok. Moved to another city & didn't hook up again but found it helpful when just starting.

There might even be a group of people plowing thru Graham. Established groups usually get invited to meet at area brokerage houses (duh!:) so snacks and stuff & get to monkey w/everyones software.

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#11) On November 15, 2009 at 6:12 PM, meganchip (53.84) wrote:

Caterpillar that was such a GREAT idea I went right over to check out meetup.com and found that ... unless I want to invest in real estate (no - thank - you) there's not much else.

Great idea though. I'll keep looking. You would think there's just got to be something in the Philadelphia area!! It's not like I'm out in the middle of nowhere!

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#12) On November 15, 2009 at 6:14 PM, meganchip (53.84) wrote:

Teacherman - will be interested to know if and when you buy. Wish there was more opportunity for direct conversation on this site. The discussion forums seem hit and miss.

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#13) On November 15, 2009 at 7:42 PM, Teacherman1 (89.36) wrote:

If you put a short pitch on your Pick site by hwcc. Doesn't have to be indepth. Just "Like it's prospects".

Could then reply to that and let you know if and when I decide to buy.

If and when I buy, I will eventually put a pitch on my Pick site also.

Have a good weekend.

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#14) On November 15, 2009 at 8:08 PM, msftgev (96.83) wrote:

Serious physicists read about Sir Isaac Newton to learn his teachings about gravity and motion. Serious investors read Benjamin Graham's work to learn about finance and investments.

Known as "the father of value investing" and the "Dean of Wall Street", Ben Graham (1894-1976) excelled at making money in the stock market for himself and his clients without taking big risks. Graham created and taught many principles of investing safely and successfully that modern investors continue to use today. (Looking for some good books to read? See Ten Books Every Investor Should Read, Books Worth Investing In and Investing Books It Pays To Read.)

These ideas were built on Graham's diligent, almost surgical, financial evaluation of companies. His experience led to simple, effective logic, upon which Graham built a successful method for investing.

His Legacy
Graham's work is legendary in investment circles. He's been credited as the creator of the security analysis profession, and the man who formed the Chartered Financial Analyst (CFA) designation (through both his writings and his work on the subject).

While best known as Warren Buffett's mentor, Graham was also a famous author, most notably for his books, "Security Analysis" (1934) and "The Intelligent Investor" (1949). Graham was one of the first to solely use financial analysis to successfully invest in stocks. He was also instrumental in drafting many elements of the Securities Act of 1933, also known as the "Truth in Securities Act", which, among other things, required companies to provide financial statements certified by independent accountants. This made Graham's work of financial analysis much easier and more efficient, and in this new paradigm, he succeeded. (To learn more about Buffett or other great investors, read Warren Buffett: How He Does It, What Is Warren Buffett's Investing Style? and Financial Wisdom From Three Wise Men.)

His Beginnings
Graham was a star student at Columbia University, and went to work on Wall Street shortly after graduation in 1914. He built up a sizable personal nest egg over the next 15 years with the use of his keen attention to details. Even so, he hadn't yet honed his investment strategy.

He lost most of his money in the stock market crash of 1929 and the subsequent Great Depression. After learning a hard lesson about risk, he wrote "Security Analysis" (published in 1934), which chronicled Graham's methods to analyze and value securities. This book has been used for decades in finance courses as the seminal work in the field.

His Highs and Lows
His losses in the stock market crash of 1929 and the subsequent bear market during the Great Depression lead Graham to hone his investment techniques. These techniques sought to profit in stocks while minimizing downside risk. He did this by buying shares of companies whose shares traded far below the companies' liquidation value. (To find out more about these desperate times, check out The Greatest Market Crashes and The Stock Market: A Look Back.)

In simple terms, his goal was to buy a dollar's worth of assets for $0.50, and he did that very well, both in theory and in practice.

There were two general ways that Graham used to do this. The first method was the use of market psychology. That is, using the fear and greed of the market to his advantage. The second was to invest by the numbers.

His Theories: "Mr. Market" and Margin of Safety
Graham stressed the importance of looking at the market as one would a business partner who offers to buy you out, or sell you his interest daily. Graham referred to this imaginary person as "Mr. Market". Graham said that sometimes Mr. Market's price makes sense, but sometimes it is way too high or low given the economic realities of the business.

You, as the investor, are free to buy Mr. Market's interest, sell out to him or even ignore him if you don't like his price. You may ignore him because he always comes back tomorrow with a different offer. This is the "use market" psychology. Graham viewed the freedom to be able to say "no" as a major advantage the average investor had over the professional who was required to be invested at all times, regardless of the current valuation of securities.

Graham also stressed the importance of always having a margin of safety in one's investments. This meant only buying into a stock at a price that is well below a conservative value of the business. This is important because it allows profit on the upside as the market eventually revalues the stock to its fair value, and it also gives some protection on the downside if things don't work out as planned and the business falters. This was the mathematical side of his work.

His Life as a Great Investor and Teacher
In addition to his investment work, Graham taught a class in security analysis at his alma mater, Columbia University. Here, he was fascinated with the process and strategy of investing - just as much as he was fascinated with making money. To this end, he wrote "The Intelligent Investor" in 1949. This book provided more practical advice to the common investor than did "Security Analysis", and it became one of the best-selling investment books of all time.

Warren Buffett describes "The Intelligent Investor" as "by far the best book on investing ever written" - high praise for a relatively simple book. Buffett has said that Graham was incredibly generous toward others especially with his investment ideas. In fact, Graham spent the better part of his retirement years working on new, simplified formulas to help average investors invest in stocks. Buffett now too follows this credo as he views his annual meetings as a chance to share his knowledge with the average investor.

After reading "The Intelligent Investor" at 19, Buffett enrolled in Columbia Business School in order to study under Graham, and they subsequently developed a lifelong friendship. Later, he worked for Graham at his company, the Graham-Newman Corporation, which was similar to a closed-end mutual fund. Buffett worked there for two years until Graham decided to close the business and retire.

Afterward, many of Graham's clients asked Warren Buffett to manage their money, and, as they say, the rest is history. Buffett went on to develop his own strategy, which differed from Graham's in that he stressed the importance of a business's quality and of holding investments indefinitely. Graham would typically invest based purely on the numbers of a company, and he would sell an investment at a predetermined value. Even so, Buffett has said that no one ever lost money by following Graham's methods and advice.

If you're really interested in getting better results from your investments, then you should to read (and even re-read) Graham's work.

His Return On Investments
If you're wondering how Graham fared on his investments, it has been said that he averaged about a 20% annual return through his many years of managing money, although details of Graham's investments are not readily available. He achieved these results at a time when buying common stocks was widely regarded as a pure gamble, but Graham bought stocks with a method that both provided both low risk and a good return. For this reason, Graham was a true pioneer of financial analysis.

Note: To learn more about Graham and his students, check out the appendix and postscript of "The Intelligent Investor" (Harper and Row, 1976 edition).

To find out about more investing gurus, see our Greatest Investors tutorial.

Hope this is helpful.

Fool On

msftgev

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#15) On November 15, 2009 at 8:27 PM, dwot (99.98) wrote:

I have lost too much money a few times and I have looked that the reasons why I lost money. Right now I don't see much foundation in the economy and so rather than take risks that I see as having more down side potential then upside potential I just watch.

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