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How I Pick Stocks in Real Life

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August 26, 2009 – Comments (10)

I've been blogging here since January, and I received a great deal of encouragement.  It's really awesome when you get an email of facebook message saying "i loved that!"

But if you notice, I don't blog about stocks. I'm uncomfortable with it.  First off, if you look hard enough, you will find some absolute titans of investing here.  There are some really great fundamental and technical analysis practitioners on this site.  Often, they are crowded out by all the noise, but if you know who they are, listen when they speak.

I don't have the experience or the knowledge as an investor to pass myself off as anything but amateur.  For those who follow my blog, a blog which I never dreamed would be popular (admittedly engaging in sinful pride here), I usually stick with what I know: free market economics and political commentary.  I'm a big picture guy. 

However, I do invest real money.  I manage my own portfolio.  I started by paying off all my debt.  In the meantime, I was reading Buffett, Graham (I read The Intelligent Investor three times - and it was still boring), Peter Lynch, Jim Rogers (Investment Biker was fun and right up my alley, as I've spent a lot of time in the same places.), and of course The Motley Fool.  I've been a regular, silent visitor here for years.

So let's just say that I'm embarrased to give stock advice here.  I don't wish to be seen as an arrogant jerk (my regular persona, it seems) distilling wisdom that might not actually be wisdom.  I don't have 30 years of investing under my belt.  And in investing, you can't make up for lost time.  You have to invest to learn about investing.  Books only take you so far.

Before I get into the simplicity of my strategy, let me say two things.

1. I can't and won't learn technical analysis.  From all appearances, it is a constantly evolving strategy that requires you to practice it as much as your full time job.  I could never dedicate that much time to money management.  It doesn't jive with me.  Why not spend that time learning another skill?  Then you don't have to sweat the latest stochastics, or whatever, and calculating theta for everything.  Look, I love math, but jeez, I'm not an actuary.  I get enough math from my simple programming hobbies.  No mas, no mas.  On top of that, though some claim greater returns with TA (and god i hope so considering how much work you put into it), I don't see any evidence that great TA practitioners retire as millionaires or turn that money into great businesses.  Finally, it upsets the logical side of my brain, which needs an a priori starting point in order to orientate.  I'm weird like that. For me, that starting point is, how much would I pay for your business?

2.  My CAPS portfolio is worthless, literally and figuratively.  Most of the real life stocks I own are not rateable.  Most of the stocks I like, but don't own yet, are not rateable.  So I'm left with red thumbing all those crappy 3x ETF's.  I don't find the CAPS game to be all that fun, so I rarely bother with it.  Since there is no penalty for transaction fees, and no taxes for short term gains, it rewards traders.  There have been suggestions on how to improve it.  Most are well thought out.  I won't add any more to that.

So those are the main reasons I don't blog stocks.  There is one last reason, and it's a big one.  I'm not a shill.  If I were to blog about an individual stock that I like, it would already be in my portfolio!  Why would I tell you that I like a company, but that I won't buy it or plan to buy it?  That's a shill.  The honest man makes a decision and stands by it.  But, lately, I've seen a few guys with guts stand up say, here is my portfolio.  I like those posts.  I may not like the companies you own, but you've got guts. 

So here goes.

Only two things matter to me.  What are you worth and what you do with your cash?  That's it.  I try to cut through all the nonsense.  I don't care about earnings.  Let's say that I earned $150,000 last year.  But at the end of the year I had $22,000 in cash.  The year before I had $16,000.  Well, that's great, right?  Well what happened to the other $144,000?  If it's not in my cash on hand, it better be reflected somewhere else.  It better have been saved or used productively, to eat, pay my bills, etc.  Why should a company operate under different rules?  Where did your cash go?  If your accountants can't answer that question, piss off.  I don't want anything to do with you.  You're B.S.ing me, straight up. 

When I go to buy your house, you say it's worth $300,000.  I say bull crap.  Who says?  You say, "well the appraiser said...."  Nope, stop talking, you're an idiot. Did the appraiser make you an offer?  No?  Then eff the appraiser, cuz he don't mean squat to me.  Same with your balance sheet.  It says here that your plant and equipment is worth $27 mil.  Really?  Says who?  You're accountants?  Baloney.  I bet you couldn't get $15 mil for it.  Wanna bet?  You feel like gambling?  Oh, you've depreciated it already?  By what standard?  Did you offer it up on Ebay or something to guage your 50 year old factory's value?  You're smoking pot.  It worth diddly you-know-what.  But you know what is real?  That debt you're saddled with.  Sure as shootin, the bank'll be calling.  So you better be using that cash right.

In other words, I drive a really hard bargain.  That's how I pick stocks.  This is why I say I'll look at a 100 companies (I've learned how to go over a financial report and pick out the juicy stuff - I think), and find 1 or 2 that I like, that are worth further consideration.  Lately, it's quite rare to find a company that I would want to own.  Most reports are nonsensical marketing campaigns disguised as financial statements.  Give me a break.  You're bleeding.   Just admit it.

Some may say, 'but David you're going to miss out on the big growth companies.'  Maybe.  I'd like to know how many companies became great when they couldn't manage their cash in the first place. 

I guess I could be wrong about all this, but it fits my personality.  I can be brutish and and I'll never be confused with the PC crowd and high society.  I like luxury and I don't mind paying for it, but I don't want to hobnob with you at cocktail hour.  I want to give you 15 cents for something that's worth 25, that you're trying to sell me for 50. 

David in Qatar

10 Comments – Post Your Own

#1) On August 26, 2009 at 9:39 PM, dbjella (< 20) wrote:

I assume marines have foul mouths "Then eff the appraiser, cuz he don't mean squat to me" and that is who you learned from.

David, you are a great thinker and writer. I have wondered and thought more about your your posts than any blogger on the fool. I like people that can express thoughts without cussing though. Simple men cuss, because they don't think..it is too easy for them to "settle."

Just my two cents as you are better than that. Now, down off my high horse...heya :)

Doug

(who gave up swearing 10 years ago when I thought about it for a while)

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#2) On August 26, 2009 at 9:49 PM, whereaminow (< 20) wrote:

LOL, for Marines, cussing is an art form.  I have heard, repeated, and innovated myself, some of the most colorful collections of expletives ever to fall on human ears :)

And yes, you're right.  I know this.  And I don't mind you for saying so.

David in Qatar

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#3) On August 26, 2009 at 10:08 PM, djudah (< 20) wrote:

David,

Admittedly, my first time reading one of your posts.  I found it great and along the same way I think (mainly about personal finance that is).  Keep up the good work and best of luck to you.

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#4) On August 26, 2009 at 10:32 PM, starbucks4ever (98.54) wrote:

A very reasonable approach. I don't see too many bargains at these prices either. To be sure, some US blue chips still look OK to me. China, on the other hand, just scares the crap out of me. I mean, a forwatrd PE of 40 for some hotel chain like HMIN, and that if you choose to trust their accounting? C'mon, people, get real. Even GOOG looks safe in comparison.

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#5) On August 26, 2009 at 10:39 PM, ChrisGraley (29.86) wrote:

David, I'm another guy that will probably never learn technical analysis. But what I do, is see if the tech guys agree with me. If they don't, I take a little harder look before I buy the stock. I don't let them change my opinion though. Charts don't relate to long term fundamentals well. They can show you short term market sentiment though.

I do wish you would post a little more on stocks that you like because I think we have a lot of the same values. The other people on the site with those values have given me an endless supply of great stock ideas that I might not have found on my own.

I tend to look for your posts daily and I might not always reply, but I almost always rec.

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#6) On August 26, 2009 at 11:41 PM, GeneralDemon (< 20) wrote:

You're right about the CAPS game - my investing style (passed down from my Grandfathers to Father to me) spans 90 years - and guess what the biggest part of it is? - weighting - something you can't do in CAPS -also, my favorite stock just made it to 100M market cap - so my CAPS score can't reflect the majority of my portfolio.

Keep Blogging - you're good to read.

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#7) On August 27, 2009 at 12:52 AM, angusthermopylae (40.73) wrote:

An old engineering instructor of mine started the first day of class like this:

"My name is Commander May, and I'll be teaching this class for the next semester.  Just to give you a rundown, I started out as a boiler tech in the Navy 26 years ago, worked my way up to chief, then jumped to the LDO (Limited Duty Officer) program.

I've spent the majority of my career with the snipes down in the bilges of ships.  Because of that long, long exposure to the rougher parts of the Navy, my classroom language may be sprinkled liberally with some more..."colorful"...phrasings that I've picked up over the years.  Since this is a mixed class of men and women, I would like to say this in advance:  If anyone is offended by such language....

...f*** off...I'm an old man and I'm not going to change my ways."

 

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#8) On August 27, 2009 at 1:40 AM, ozzfan1317 (78.68) wrote:

Good stuff I combine value and growth investing for my portfolio but the majority of my positions are still in dividend stocks.

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#9) On August 27, 2009 at 11:02 AM, leohaas (31.55) wrote:

Excellent blog!

Cash flow management is key for any company (as well as for individuals). I once worked for a publicly traded company that was not good at managing cash. Nevertheless, they became one of Wall Street's darlings. I participated in their employee stock purchase plan and ignored the writing on the wall. It was an expensive lesson, but I learned it.

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#10) On August 27, 2009 at 5:12 PM, whereaminow (< 20) wrote:

Hi all,

Thanks for the kind response.  Perhaps I will blog about stocks a little more.  It can't hurt right?  At worst, GD tells me I'm retarded and I learn something new :)

GeneralDemon ,

My parents and grandparents collective intelligence on stocks would be the shortest book ever written.  I'm way jealous!!!

David in Qatar

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