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JaysRage (94.04)

My Twelve Lessons from 2009

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December 29, 2009 – Comments (13) | RELATED TICKERS: BNS , APWR , GE

Lesson 1:  Don't believe that 6-8% annual returns are good.   Understand who are making statements like that and what they have to gain by having you believe them.  

Lesson 2:  If I've heard about them without digging, so has everyone else and their brother and their cab driver and their hair-dresser. 

Lesson 3:  Keep cash around to take advantage of opportunities.

Lesson 4:  There are a whole lot of under-priced companies in the world, in any economic environment.  

Lesson 5:  Diversification is a worthless wealth-crippling strategy.  

Lesson 6:  Don't listen to people who tell you that you can't achieve your investing goals, no matter what they may be.   Most of them are justifying their own meager returns.  

Lesson 7:  Anything worth anything requires doing your homework, and most people don't want to put in the work to be successful.   If you are willing to do so, it will reap rewards, continually.  

Lesson 8:  There are always people who know something that you don't.   Listen, watch and learn.   Then apply what you've learned.  

Lesson 9:  Most investing tips come from people who are already invested in the stock they are telling you about, including TMF.  

Lesson 10: Even good stocks give surprising entry points if you are willing to wait for them.   

Lesson 11: Be prepared to act decisively when an opportunity occurs.   Have your preparation done in advance so that you can act quickly and efficiently at the appointed time. 

Lesson 12: Control your emotions. 

Hopefully, I'll have 12 new insights at the end of 2010.   Fool on! 

13 Comments – Post Your Own

#1) On December 29, 2009 at 3:50 PM, kdakota630 (32.05) wrote:

My former "financial advisor" told me that I was better off achieving 5-8% returns through his mutual funds than to go for the 11% I could probably get from an index fund, because (according to him) the mutual funds would be more consistent in achieving 5-8% than the index fund.

Needless to say, I didn't use him for long after that comment.

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#2) On December 29, 2009 at 4:36 PM, dragonLZ (99.49) wrote:

These lessons are great, but one can tell they are coming from a "bull year" when it was "easy" to make money.

Combining the lessons one learns having the skin in the game during both bull and bear markets is what makes someone a successful investor. Just my opinion.

Very good post. Always glad to see what other people are thinking about the market and what they are learning from it.

Good Luck in 2010!

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#3) On December 29, 2009 at 4:56 PM, JaysRage (94.04) wrote:

DLZ -- What makes you think you know how much "skin" I have in the game and for how long?    What makes you think you know when and how I made or didn't make my money this year?  Or even what my investing goals were or whether I reached them?     

Well, I would say that 2009 was both a bear and a bull market.   I also think that the above statements are true in a bull or a bear market, and the lessons came from both.  

In fact, #3 and #5 were learned the most when I was fully invested in the market when it reached rock bottom in March and I had no liquid assets to take advantage of huge bargains because I had all of my money invested in diversified mutual funds, even in my short-term portfolio.        

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#4) On December 29, 2009 at 5:11 PM, bg11235 (29.31) wrote:

Nice list. If I could master those lessons I'll have a nice 2010. But I would modify #5 by #7. Diversification can help you control risk if you do your homework and don't just blindly follow conventional wisdom. But you yourself note that you shouldn't be fully invested so you have cash to take advantage of opportunities (#2). That's diversification! (Or a little bit of it anyway). Even master alpha hunters diversify. The secret is to avoid diversifying away your analytic edge and focus on diversifying where you lack knowlege, lack wisdom, or are in the hands of the fates. Even for great investors, those three cover a lot of ground.

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#5) On December 29, 2009 at 5:38 PM, JaysRage (94.04) wrote:

Ha!   Good points bg11235!   I suppose cash is a form of diversification.    I never looked at it that way, but there's no question that I use it that way.       

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#6) On December 29, 2009 at 6:21 PM, tkell31 (< 20) wrote:

Lesson 3:  Keep cash around to take advantage of opportunities.

Cant you just sell out of a position to take advantage of the opportunity?  Leaving enough money on the sideline to take advantage of the opportunity seems like it is not taking full advantage of the other investments you selected.  Is there an overall % you would suggest leaving in cash or the equivalent?  Once that is used do you suggest selling out of another position to have more cash ready for the next opportunity?

6-8% seems like what monay managers have trained us to believe so they can skim their 2-3% and still have enough left to show a "good" return.

Controlling emotions!  Great one.  I've trained myself to sell covered calls on spikes and sell puts on drops.  Better premium and the move is usually not sustained without at least some correction.  However, despite knowing that and having multiple examples where it was exactly the right thing to do I still find myself fighting the urge to to do the opposite because it just feels more natural.

Fight the herd mentality.  Its been pointed out that it is easy and psychologically appealing to do what everyone else is doing, but rarely is it the best or right thing to do.  However if you cant do that then getting in safe dividend stocks and reinvesting the proceeds is probably a nice safe way to generate good returns.

Good luck to everyone!

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#7) On December 29, 2009 at 8:29 PM, JaysRage (94.04) wrote:

I now require myself to keep enough cash to make a minimum purchase.    For me, that is 8% cash.   Sometimes you can't exit another position (without paying a premium to do so) fast enough to take advantage of your opportunity....depending on the liquidity of your positions.

Then you can sell another position gracefully that you purchased to replace your cash position to put yourself back to equilibrium.   My opinion/learning is that there are opportunities that are worth waiting for, and you won't know them until you see them.    To take advantage of your opportunity, sometimes you have to move fast.  You don't want to abandon your other positions pre-maturely either.   Once I enter an investment, I intend to stay in it until I reach my minimum target price.   If I can exit another lesser opportunity easily, I will actually do that rather than use my cash reserve.  

Let's paint a picture.    You've got four significant positions.   Each position is waiting upon a one-time event for a significant gain.....earnings.....uplisting.....split....pending contract....etc.....or they have just experience an unexplained drop and will likely rebound significantly in the near term.   You discover a 50% one-time event for another stock during that same period.   You use the cash.    You can replenish after one or more of one-time events clears.    

Now, the OTHER scenario.   The whole economy hits the fan.  Everything drops like a rock, including your quality, but volatile small caps.   You're under-water on all your positions.  You still like them but have to wait for earnings to overcome the macro-economics.    You can use your cash to acquire at least one solid position at one-time prices.   

I understand your point, though.   As I develop more of a backlog of quality stocks that I'm following, I am more and more tempted to throw that extra 8% into the mix.   So far, I've been disciplined enough not to.  

That's portfolio cash.   I also keep a emergency fund, which is not touchable for investing purposes or under any but extreme circumstances.     

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#8) On December 29, 2009 at 8:58 PM, tkell31 (< 20) wrote:

Yeah, right now I have quite a few stocks I'm interested in that I cant buy.  I try to determine which ones have the best upside, but since I dont think I can do that with certainty I find myself diversifying almost unintentionally.  My biggest challenge (that I recognize) is making sure I'm invested in the companies with the best chance of success.  I'm getting out of ATVI when my Jan calls expire as I just dont see it having the upward potential of companies I've been waiting to buy.  Just disapppointed I left my money in it as long as I did.

I just wish I had done this much work back in March.  I really blew the easiest investing opportunity I may see in my lifetime.  I will finish the year up 50%, but when you consider I didnt invest until mid-March that isnt very impressive.  While I dont anticipate a significant dip (one testing last years lows) I am curious to see how I will handle a 10-15% pull back as I think that will test my development as an investor much more so then the last nine months.

Nice article.

 

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#9) On December 29, 2009 at 11:35 PM, Tastylunch (29.97) wrote:

Lesson 5:  Diversification is a worthless wealth-crippling strategy.  

Walter Schloss proved you wrong on that one. He held over ~ 100 positions at one time and had annual CAGR of 16%+ over 54 years

Lesson 12: Control your emotions.  

I agree 100%. everything else is worthless if you can't do this.

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#10) On December 29, 2009 at 11:48 PM, TMFUltraLong (99.97) wrote:

Lesson 13: Do exactly as I do, not as I say =)

UltraLong

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#11) On December 29, 2009 at 11:50 PM, JaysRage (94.04) wrote:

It is important not to compare me to Walter Schloss for many reasons.    For what Walter Schloss was responsible for, those are stellar returns.    With the amount of money that he was managing and how he would be forced to manage it, those results are absolutely astounding.   Let me say that first and foremost.    Peter Lynch is probably a better example.   He successfully managed a portfolio where he was invested in hundreds of small caps in order to be able to spread the money far enough to stay in the small cap space while managing a hedge level portfolio.   Darn impressive....and with 20% returns to boot.   Legendary.....

However, I am a small investor.   I am not limited by any restrictions.   I can invest in nano, micro, small, mid, large and mega stocks.  Not only that, I can put a significant percentage of my portfolio in those stocks if I desire.   I can invest in U.S. or foreign equities.   

If I can't crush that return rate in my situation, I'm a poor investor.    I should to be able to beat the S&P by significantly more than 6%.    If not, I need to give serious consideration to the amount of time and effort that I am putting into my investments.      

Once I become a large investor, out of necessity, I will need to change my investing strategy accordingly.  

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#12) On January 10, 2010 at 6:30 PM, gartersnk (34.39) wrote:

Great advice

Hard to keep that cash aside when there so many opps, but that's the emotional control

To a great 2010......................

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#13) On January 24, 2010 at 7:31 AM, jamespeer (25.98) wrote:

CASH IS KING IN 2010!  Move into safer assets. Go on holiday, take a break from equities, we had a good 2009 don't expect the same again this year...

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