Have you ever been looking at a stock you like and you see that in the past year it traded at a price that was way too cheap? It’s frustrating. You’re working hard to find the next bargain, and you realize that, on such and such a day, a stock you understood was available at a price that you would snap up in an instant if it were available to you today.
These are somewhat like Buffett’s “sins of omission” – situations where he should have loaded up, but he did not pull the trigger. What I’m talking about is a little different. In Buffett’s case, he had the elephant in his sights and did not pull the trigger. In the case I’m talking about (to stretch the analogy a bit), the elephant was right in your backyard, but you did not even realize it.
What can we learn from these situations?
- You need to do your homework. In order to pull the trigger with confidence, you need to have identified at least a handful of prospects that you understand and a price at which buying them would be a “no brainer”. John Templeton would do his valuation work, put in rock-bottom good-til-cancelled buy orders when the market’s outlook was still rosy and wait.
- You need to have cash to buy when stocks are low and fear is predominant. This requires holding your powder and not committing your capital to mediocre opportunities. Set a minimum required ROI and don’t invest unless it’s clear you can get it. Buffett is said to use a 15% minimum hurdle.
- Learn how to think (properly) about market prices. As Buffett has said many times, people are happy when the items they buy everyday – food, gas, clothes, etc. – go on sale because they can purchase them at a bargain. But when stocks go on sale, most “investors” want the safety of cash or the warmth of the herd. This is folly and damaging to your long-term returns. Learn what you’re doing so you can buy with confidence when others are heading for the exits. (Study carefully chapter 8 of The Intelligent Investor.)
- Set up a system so things don’t fall through the cracks. As human beings we are subject to numerous frailties. One of them is the tendency to neglect things that are important to us – to “take our eye off the ball”. Important – sometimes critical – things come onto and off of our radar all the time, things that it is in our interest to stay on top of. To counter this we need systems. It does not matter so much what the system is as long as it is in place and you stay with it. Resolve today, if you have not already done so, to put a system in place so you don’t miss the next investing “fat pitch”. Maybe it’s checking the new low list EVERY week, or going through Value Line on a regular basis, or running a basic screen each week of low P/E stocks. None of these is perfect and there are lots of other ways to generate ideas, but such a minimal system will pay off if done consistently. One day in the future you’ll wake up, check your system, and one of those big fat moving elephants will be right in your sights.
We don’t back into decisions
While we’re at it, I mention that I sold a few stocks on Friday into the strength of the rally. I chose a few stocks that have been in my portfolio for a while and that were holdovers from a managed account I used to have. A couple showed good gains; one did not, which is beside the point. I sold them because I did not understand them well (I did not pick them in the first place) and therefore I could not value them with confidence. I believe a good portfolio is one where the investment thesis for each holding is clear. “If you don’t know where you’re going, any road will take you there.”
Buffett talks about this in his 1998 shareholder letter regarding Berkshire Hathaway’s purchase of General Re. “Once we knew that the General Re merger would definitely take place, we asked the company to dispose of the equities that it held. (As mentioned earlier, we do not manage the Cologne Re portfolio, which includes many equities.) General Re subsequently eliminated its positions in about 250 common stocks, incurring $935 million of taxes in the process. This “clean sweep” approach reflects a basic principle that Charlie and I employ in business and investing: We don’t back into decisions.”