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This time I may have crossed the line...

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March 01, 2010 – Comments (8) | RELATED TICKERS: BRK-A , BRK-B

Have I finally gone from eccentric to just plain crazy?

With this article, I began my attempt to follow Warren Buffett's advice to research all of the publicly traded companies in order to find good opportunities.

This first article only included three companies, but I'm planning on including at least five in future iterations (with less introductory gabbing). 

So what do you think? Am I nuts? Was Buffett nuts to suggest it in the first place?

Also, for those that check out the article, I'm curious if there's anything additional / different that you'd like to see. I can't promise I'll use all ideas, but I'd ideally like this article series to be as useful to readers as possible.

Matt

8 Comments – Post Your Own

#1) On March 02, 2010 at 12:01 AM, Tastylunch (29.48) wrote:

I think it's brilliant, TMFKopp. I really do. And I also think it's fun.

Perhaps because I've been using CAPS as tool to help me do this for two years gradually myself. :)

 the real question to me is can you do this in a  way that your offspring can benefit.

e.g. this is of little value if you can'tt pass the knowledge on, especially if it might take you yeras to gain. It could be years before you see any financial benefit from this.

I think it would probbaly be more valuable to go sector by sector or industry by industry instead of random though. Once you say have a solid mental model of say how refiners work, than invetsigating other ones becomes faster and easier.

another thing I do is I read up on nearly every IPO that comes onto  market. reading their prospecti is a great way to learn about their businesses.

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#2) On March 02, 2010 at 6:45 PM, chk999 (99.97) wrote:

Often the difference between brilliant and crazy is if the idea worked.

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#3) On March 02, 2010 at 7:29 PM, TMFCrocoStimpy (90.40) wrote:

Easy way to gauge the difference:

Bottom 99% of economic ladder == crazy

Top 1% of economic ladder == eccentric

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#4) On March 02, 2010 at 8:19 PM, TMFKopp (97.01) wrote:

@Tastylunch

I agree with you on pretty much all fronts. 

As far as going industry-by-industry though, my thought entering into this is that it is completely non-exclusionary. In other words, I'm not going based on industry, P/E ratio, return on equity, etc. It just gives you a chance to look at anything and everything.

I have actually always been on the idea of getting to know the nuts and bolts of an industry before investing in it so I could build extensive models and the like. However, I'm not so sure how much this contributes to strong investing returns. I mean, look at Wall Street analysts -- they spend all of their time digging up the minute details of the industries they cover, yet most analysts would probably not make terribly good portfolio managers (at least judging by their accuracy).

There was an article on Fool.com in '08 (http://www.fool.com/investing/value/2008/05/19/buffett-proclaims-his-ignorance.aspx) that kind of spoke to this. Basically, Rich points out that Buffett didn't know about the minute details of the drug companies he was investing in, but what he knew is that they were quality, well-run businesses, that appeared to be selling at fair prices.

 

@chk999 and TMFCrocoStimpy

:)

 

Matt

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#5) On March 02, 2010 at 11:12 PM, Tastylunch (29.48) wrote:

TMFKopp

>-look at Wall Street analysts -- they spend all of their time digging up the minute details of the industries they cover, yet most analysts would probably not make terribly good portfolio managers (at least judging by their accuracy).

To be fair Sell Side analysts have all sorts of COI issues and social pressures that prevent them from doing great work imo. The Sell Sides guys are trained to find/present the positive as opposed to the turth if you will.

my impression is the buy side guys have a much better track record.

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#6) On March 05, 2010 at 12:43 AM, TMFKopp (97.01) wrote:

@Tastylunch

Fair point for sure.

I think I'm just a little biased against complex modeling. I've done a lot of it in the past and it always seemed to me that your answer paradoxically had a tendency of getting more vague as you added additional complexity.

In many cases unless you're actually in the industry, you're going to have a tough time projecting a lot of the minutia and will likely end up just plugging numbers to make, say, the overall operating margin look correct. And if you're doing that, then all you've done is create more places where your model can be off kilter without you realizing.

But again, I'm just talking about my own prejudices.

That's not to say that I completely disagree with you. At the very least you ought to have a working knowledge of an industry before you bother investing there. For example, if you don't know a crack spread from a ... well...you know... then you probably shouldn't be investing in refiners quite yet.

Matt

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#7) On March 05, 2010 at 12:47 AM, TMFKopp (97.01) wrote:

@Tastylunch

A quick follow-up thought to that is that there's also an issue of time value here. Whether we're talking buy-side or sell-side those analysts are paid a heck of a lot of money to do what they do, and it's worth (in some cases) paying them that because their work will dictate investments on the scale of millions of dollars.

For an average Joe looking to invest, say, $10,000 in a stock, there's simply not the same value in spending the time to build a complete model -- unless, that is, the person in question simply enjoys that pursuit or they work in a minimum wage job so the time value isn't that high...

Matt

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#8) On March 05, 2010 at 2:14 PM, Tastylunch (29.48) wrote:

TMFKopp

I think we pretty much see things the same way. One of the downsides of the internet is it's so easy to have incomplete communication and have disagreements over issues where you maya ctually see things more or less the same way as another person.

>-I think I'm just a little biased against complex modeling. I've done a lot of it in the past and it always seemed to me that your answer paradoxically had a tendency of getting more vague as you added additional complexity.

I have no disagreement that it is much tougher, GIGO in any complex model is a never ending problem especially for the new or inexperienced. Hopefully over time you can elimiate some of that as one practices. It never completely goes away though.

 But guys like Seth Klarman make killer conistent returns by figuring the answers to hard to analyze securities. In a way I view that as the final investing method frontier. The downside to the internet is that it makes what used to be hard so easy that it's harder to take advantage of mispricings becasue more people pick up on them quicker now.

With the right software anyone can find a stock with extremely low PEG or a great NCAV play within ten minutes. That used to take  days to weeks.

That is also why I stick primarily to small caps. less hot interest from big money competing with me, allows me the time to make good decisions.

So while I totally get what you are saying to me the time is worth it if I can improve my returns enough (and cosnequently improve my skill level to where i can make decisions faster in the future). I think investing in stocks really a two part question

a)- Am I willing to do work to beat the market? (if no buy index funds)

b)- By how much do I wish to beat the market and how hard am I willing to work? (the pick appropriate time committment method from this)

So to me complex modeling fits in the higer end of the answer to b. It's up to the individual whether they are willing to do that or not.

And at least for me doing more work now, helps improve my understanding of strengths and weaknesses of simpler methods that I can use later if I wish (and I use some now)

>-At the very least you ought to have a working knowledge of an industry before you bother investing there.

Absolutely agree 100%

>-A quick follow-up thought to that is that there's also an issue of time value here

Again completely agree. if there were not the Fool would not exist as it is today imo. That's what your newsletters address for your customers. If you ask most people I'd bet they tell you, that a- they wnat to crush the market and b) they don't wnat to do the work required to do so reliably. :)

>-For an average Joe looking to invest, say, $10,000 in a stock, there's simply not the same value in spending the time to build a complete model -- unless, that is, the person in question simply enjoys that pursuit ......

That would be me. plus I find it helpful skill to develop in managing my own businesses.

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