Hard Won Wisdom
April 11, 2014 4 Comments
In 2001 and 2002 I lost all my money through bad investing. The same thing happened to me on a couple of occasions after that.So why should anyone listen to me about investing? You shouldn’t. You shouldn’t listen to anyone at all about investing. This is your hard-earned money. Don’t blow it by listening to an idiot like me.Here’s my experience (and perhaps I’ve learned the hard way about what NOT to do and a little bit about what TO do.
I’ve run a hedge fund that was successful. I ran a fund of hedge funds, which means I’ve probably analyzed the track records and strategies of about 1000 different hedge funds. I’ve been a venture capitalist and a successful angel investor (I was a HORRIBLE venture capitalist though – but I put that under the category of “does not work well with others”).I can’t raise money anymore. Nor do I want to play that game. I don’t BS about my losses and everyone else does. So I’m not in that business anymore. It’s too much work to run a fund anyway.
In the past 15 years I’ve tried every investing strategy out there. I honestly can’t think of a strategy I haven’t experimented with. I’ve also wrote software to trade the markets automatically and I did very well with that. And I’ve written several books on my experiences investing, with topics ranging from automatic investing to Warren Buffett, to hedge funds, to long-term investing (my worse-selling book, “The Forever Portfolio”, which has sold 399 copies since it came out in December 2008, including one copy for the entire last quarter).Incidentally, why publish a book called “The Forever Portfolio” during the worst financial crisis in history. I begged my publisher (Penguin) to postpone but they couldn’t. “It’s in the schedule” was their magic incantation. Publishers largely suck. The good news is: they will never make back the advance. That said, all of the picks in that book have done excellently since then but the one thing I am proud of is that I made a crossword puzzle for the book. I don’t know of any other investing book with a crossword puzzle in it. So, Ok! Let’s get started. Don’t follow any of my advice. This is advice that I do and follow and it works for me.
- People who hold stocks FOREVER. Think: Warren Buffett (has never sold a share of Berkshire Hathaway since 1967) or Bill Gates (he sells shares but for 20 years basically held onto his MSFT stock).
- People who hold stocks for a millionth of a second (see Michael Lewis’s book “Flash Boys” which I highly recommend.) This is borderline illegal and I don’t recommend it.
- People who cheat.
I’ve seen it for 20 years. I’ve seen every scam. I can write a history of scams in the past 20 years. Without describing them, here’s the history: Reg S, Calendar trading, Mutual fund timing, Death spirals, Front running, Pump and Dump, manipulating illiquid stocks, Ponzi schemes, and inside information. Inside information has always existed and always will exist.
- A company will be around 20 years from now.
- At some point, company’s management has demonstrated in some way that they are honest, good people. If you can get to know management even better.
- The company’s stock has crashed for some reason (think American Express in early 60s, which he loaded up on. Or Washington Post in the early 70s. Or Coca-Cola in the early 80s).
- The company’s name is a strong brand: American Express, Coke, Disney, etc.
- Demographics play a strong role.
With Coke, Buffett knew that everyone in the world would be drinking sugared water before long. Who can resist? He also started buying furniture companies right before the housing boom. He knew that as the population in the US grows, people will need chairs to sit on.Note that Buffett is not what some people call a “Value investor”. But I won’t get into that discussion here.
- no more than 3% of your portfolio in any one stock. But if the stock grows past 3% you can keep it. To quote Warren Buffett again: “If you have Lebron James on your team, you don’t trade him away.”
- no more than 30% of your portfolio in stocks (unless some of the stocks grow, in which case you just keep letting them grow).
G, PART 2) WHAT IF WE ARE IN A BUBBLE? Bubbles don’t mean anything. We had an internet bubble in the 90s. Then a housing bubble. Bubbles bubbles bubbles. And if you just held through all of that, your stock portfolio would have been at an all time high last Friday. So ignore cycles and bubbles and ups and downs. And NEVER EVER read the news. The news has no idea about the financial world and what makes it tick. Any investing off the news is like taking out your eyes because you trust a blind person to drive you to work.
- The CEO has started and sold a business before.
- The business is a sector with a strong demographic headwind behind it. (or is that a tailwind?)
- The company has revenues and/or profits.
- You are getting a really good deal. (This is subjective but you can look at similar companies and what they were valued at.)
I can say this: every time I have invested with this approach it’s worked miracles. And every time I have not invested in this approach it’s been a DISASTER. Like, a CLUSTERF*(*K Claudia doesn’t let me invest in a private company unless all four items on my checklist apply. Which is important because I tend to believe in everything people tell me. So I’m happy to invest in a time portal black hole machine.