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Re: [sharechat] a cautionary tale?

From: "" <>
Date: Wed, 25 Feb 2004 23:07:17 +1300

Hi Stephen,
>>Did you invest knowing that you would *need* to sell out again
>>within a few months?     
>No. You're quite right - the driver was seeing my position eroded.
>Must... Not... Follow... Portfolio... Daily...

Oh, you can follow your portfolio daily.    But you don't need to *act* on 
the information daily.

>On the other hand, didn't I see you telling someone a few days ago
>that a loss was not just a paper loss but a real one?

Yes, but what you have to remember here is that it is Mr Market that is 
giving you that loss.   On any given day you can choose to sell or not 
sell to Mr Market.   Don't feel any pressure to sell, because the one 
thing I can guarantee is that whatever choice you make, Mr Market will 
be back tomorrow.   And while Mr Market is always accurate in the 
price he offers you, he does not guarantee that his offer price is fair!

If you sell at a loss to Mr Market, then not only is the loss real, but you 
have crystallized your loss.    I was trying to get across the idea that it 
is OK to be carrying a loss, *provided* that loss does not affect the 
overall integrity of your investment plan.

To repeat the main point, 

* You don't have to sell to 'Mr Market'! * 

If you have done your own homework and you *know* that the share is 
worth more than Mr Market is willing to give you, then why not keep it?   
Perhaps because you haven't *really* done your homework properly 
and you assume that Mr Market must be a better valuer than you are?

Of course, the better at doing homework you are, the less likely you 
are to be tempted by Mr Market offering you a low price.

>>>On the menu for investigation: GPG, HQP, FRE, MFT, RNS, PVO, 
>>>buying more MHI should it dip, and learning more about ASX 
>>Possibly some good shares in there, but on a value for money basis
>>they are all inferior to the two you just sold.   I think you need
>>to learn a bit more about valuing shares.
>On what basis do you value shares? That's not a rhetorical question. 
>have a spreadsheet with a couple of formulas for just that, based on
>present value of anticipated retained earnings + dividends over
>several years. I can read financial statements, but my ability to
>project is weak.

It sounds like you have the mathematical skills and tools to do any 
share valuation.   But you have hit on the main problem with this 
approach when you said

"my ability to project is weak."

Your ability *and everyone elses* ability to project is weak!    We can 
draw up scenarios:  "If this happens then that will happen".
But it all depends on 'this' happening.    

There is an old computer programming expression abbreviated to 
'GIGO'.  It means 'Garbage In, Garbage Out' and is applicable here.    
It doesn't matter how sophisticated or meticulous you mathematical 
forecasting technique is.    Put the wrong numbers in to start with, and 
all that will come out is rubbish.

So, by my thinking, it is most important to get your input data right.     
In the various books by Mary Buffett, she goes into the kind of 
mathematical; technique that Warren Buffett might use when selecting 
an investment.  But IMO the exact mathematical method presented is 
not that important.   There are other methods that recognise the 
compounding effect of a high and repeated rate of return on retained 
earnings.   No, the most important thing in those Buffett books is that it 
allows you to pick out what is *good data* to work with.  If you only 
invest in companies that provide you with good data, then that can take 
away a lot of investment uncertainty.

...and now on a slightly different tangent

In New Zealand, and to a large extent Australia as well, we are blessed 
with having a large number of high yielding investments to choose 
from.    With this kind of investment, forecasting growth in future years 
is less important than short term forecasting the sustainability of the 
current position.    Often with this kind of share, you can make good 
money just by forecasting several month's ahead.    That means you 
don't have to restrict yourself to the handful of very long term 
companies that a classical Warren Buffett would consider. 

Some of these shares are the kind of thing that Warren Buffett wouldn't 
touch, but so what?   Deeply discounted value investing (for that is 
what high yield companies often are) is another proven technique for 
providing superior investment returns.

So Stephen, when you ask me on what basis do I value shares, I would 
say 'it depends on the company'.   But if the company is not amenable 
to a 'Growth at a Reasonable Price' analysis nor a 'Deeply Discounted 
Value' analysis, the two techniques I have outlined in this post, then I 
probably wouldn't bother valuing it at all!

>>Try this for a strategy.   Be greedy when others are fearful, and
>>fearful when others are greedy.   Works for me, and another chap
>>with the initials WB I think.
>That strikes me as being equally emotional as following the crowed,
>just 180 degrees around.  Sometimes the crowd must be right, as 
>well as wrong. 

Of course that is true, but in any investment you are buying a reality, 
filtered by a shareholder's emotional response that is all reflected as a 
share price.

Reality does change over time, but the emotional response to reality 
can change much more rapidly.   'Following the crowd' can often mean 
'following the emotional tide'.    The ebb of emotion is a capricious 
sword that has no respect for underlying quality.

Nevertheless, by buying shares that are 'out of favour', the flow of the 
emotional tide can work in yours


Message sent by Snoopy 
on Pegasus Mail version 4.02
"Sometimes to see the wood from the trees, 
you have to cut down all the trees."

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