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On Settling



March 25, 2007 – Comments (0)

I read an article this morning on the risk of settling that triggered these investing thoughts...

 I am and have always been a simple investor. That a stock is considered cheap or expensive, value or momentum, small cap or large cap, has never really been a concern of mine.

I was at conference a long time ago and got into a discussion about value investing with a friend of mine. My contention at the time was to pay attention to management first, and then to consider what a reasonable value for a stock might be.

My friend on the other hand with three simple words, reminded me that while management was indeed an integral factor in determining an investment selection, it should not be the initial primary focus.

The three words were Price Determines Return.

I have never forgotten those words all these years later, because when you think about them, they not only apply to the price you pay for a stock, the also cover the time you invest to determine whether a stock is a worthy investment candidate.

Today, I don't care that a stock suffers from contempt or neglect, if it is in favor or out of favor, or even if it is obviously cheap. None of that matters. I simply determine what I think is a reasonable value for the stock and then compare that to its current price.

I then take a few minutes just to see how the company makes its money. If those two things pique my interest, I add the stock to my watch list and go look for another stock.

Eventually I will get around to doing my due diligence on the stock, and then basis that review will add it to my portfolio, or simply leave it on my watch list. It is just not a complicated event.

In my piece "Parts Lessons" I list some of the simple steps I take in managing my investment risk, and although I don't clearly define it, all of the steps I use are based on those three simple words; Price Determines Return.

For the most part, I have to agree that many times investors simply do settle. But over time, just as investment should increase in value, an investor's understanding of their individual investment philosophy should also increase in value.

The act of equity investing is not terribly complex, though many websites, analysts, brokers, and even other investors would have you believe otherwise.

Developing a personal investment philosophy, whether a value philosophy or a dart throwing philosophy is where investing complexity resides. But once that philosophy is developed and in place, it should inherently prevent the investor from ever settling, while at the same time creating opportunities to manage investment risk.

Have a great week! 


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