Eleven Issues Facing Investors Part 2

Issues 6 to 11.

The typical investor I see, when in for a portfolio review,?suffer from misconceptions. I’ve isolated eleven.? Here are numbers 6 to 11.

See my prior issue for 1 to 5.

They are in no particular order, because some suffer from all 11 in equal amounts, some only suffer from a few.

?6. Follow technical approaches

I am a strong adherent of fundamental approaches to the market, primarily because a stock represents a fractional interest in a business and thus understanding business valuation seems to be, and has been, the right course.?? Technical approaches, while seductive in many ways (charts mimic physics, supply and demand and volume seem like rational things to follow) don’t appear to replicate very well. I can count many famous billionaires and not so famous multimillionaires who are fundamental investors, but not too many technicians on the rich lists.???? Many investors, having done so much fundamental work, get turned on or turned off by charts at EXACTLY the wrong time to buy or sell.

7.?Rely heavily on TV Gurus

I grew up watching Louis Rukeyser, whose candor and knowing wink when the gurus came on his program were my introduction to viewing guru forecasts with the appropriate level of academic skepticism.??? Watch the gurus on TV for information for entertainment and some information, but never base your thesis solely on them.

8.?Don’t know what questions to ask

This is a constant learning game.??? You need to be equipped with the “right” questions.?? Most of them, in my opinion should not be based on crystal ball stuff, but more on how the business can fail, what the risks are (both internal and external, micro and macro), what the competition looks like…

9. Don’t know how to read company reports

Unless you went to business school, or through the CFA Program, you may not know how to read a 10-K or 10-Q, but—trust me—these are not insurmountable.? With practice, a novice CAN become proficient with company report reading.

10. Focus on the wrong metric

We all have a favorite measure or metric when analyzing businesses.? Management teams are experts at pointing investors to the “pro forma” metrics THEY prefer investors to study.?? Always start with Free Cash Flow.?? Move to Return on Invested Capital.? Study the right side of the balance sheet (debt).?? All of these are shamelessly borrowed from Bufffett, Munger, and others who seem to have done well focusing on the RIGHT metrics.?? When you hear “EBITDA”, dig into Free Cash Flow.? When you hear “pro forma”, ditto.

11. Focus on the short term

I’ll say it again—you’ve put your money into a fractional interest in a business. It may have taken you seconds to do it, and—of course—if you’re wrong, you can get out almost as quickly.?? Just because there’s ease of transaction doesn’t mean you should focus on short term movements in the stock OR in the business.?? Sometimes, you will be rewarded quickly for your work.? Sometimes, the market will temporarily punish you.?? It’s impossible to predict which will happen. If you put yourself in the mindset of an owner of a business rather than a flash on a screen, you will necessarily want to put in more work (see points 8-10, above) and adopt a longer term perspective.? As Buffett has said, use the market as your servant, not as your master.

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