Interesting article on Yahoo! Finance via Wall St. Journal by Brett Arends called The Turkey Principle. In it, he talks about buying stocks of your favorite places where you dump your disposable income:
For two decades, many private investors have been trying to get rich by blindly buying shares in their favorite stores, restaurant chains and the companies that make their favorite products. They were following Peter Lynch’s advice to invest where they shopped. Mr. Lynch, the former manager at Fidelity’s Magellan fund, made this notion the cornerstone of his 1989 best seller “One Up on Wall Street.”
During the bull market of the 1990s, investors did OK. But then, everything went up anyway. In the last decade the results of following this strategy have been mixed — or worse.
I agree with Mr. Arends. Immediately coming to my mind is the quote attributed to Paul Tudor Jones: Price moves first and the fundamentals follow.
– Many who invested in Fidelity Magellan (FMAGX) lost money while Lynch ran it. They decided to trade the fund’s shares.
– Investors who bought FMAGX the day before the crash in ’87 got the worst of it: they lost huge NAV and they got a tax bill on top of it for all the capital gains that Lynch took during the sell-off b/c he needed the cash to meet redemptions.
– People who buy AAPL b/c they think Steve Jobs is an incredible genius will lose money as investors.
– People who buy CSCO b/c it’s “the backbone of the internet” may need a chiropractor before they make any money.
If you are compelled to buy things that you know and love for whatever reason, you may be lucky and make money. But have an “uncle” point: a price where you’re out no matter what you think or read about the company. That’s in the best of times. You will really get hammered when all of your holding go south at the same time. In those times, cash is king.
Cisco Case in point
I owned CSCO for myself at the turn of the century (see chart above). I didn’t know a lot of the fundamentals, but I knew generally that Cisco was a major player in the internet space. However, despite what I thought I knew, or what the street thought, the price tells you everything that you need to know about a security. If everyone loves it, it will rise. If there is fear or people are scared about anything, they will sell.
I chose an uncle point at $75 for no other reasons that it was where I was willing to transfer the risk to someone else and take my small loss. I figured I could always get back in at a higher price.
Little did I know that it would never reach $75 ever again (and that’s 10 YEARS AGO!). Looking at the chart, I’m a lot happier being out at $75 than still in it (and my ego) hoping for it to come back. Hope is a wasted emotion in trading and investing. It doesn’t serve you unless you like the feeling of hoping all the time. Then I’d suggest you keep doing it until you figure out what the feeling is trying to tell you. (Like, learn how to better manage risk dude…)
During this time, Fortune magazine has named CSCO the #1 name it their industry several times. So when you hear some jackass MF manager say “we sell when the fundamentals change” don’t give them a nickel. Give them a grin, and firm handshake, and your other hand on their shoulder as you tell them “thanks for the wonderful insight.”
Remember what Paul Tudor Jones said: Price moves first, and the fundamentals follow. Always have a sell discipline, especially if you’re a long-only investor. True for stocks and mutual funds…and a way of life with commodity futures.
Staying in a losing position can mean several things, but 2 come to mind:
– You have a big ego and don’t like being wrong
– You don’t know how to manage risk at all
I have no positions in the securities mentioned in this blog post.