Friday, February 15, 2013

Do or Do Not! There Is No Try.

Mark Twain Quote:
OCTOBER: This is one of the peculiarly dangerous months to speculate in stocks in. The other are July, January, September, April, November, May, March, June, December, August, and February.

I think this is a dangerous time to invest. I could be wrong, but I see a stock market at or near historic highs for no particular good reasons. The underlying economy, in spite of massive infusions of borrowed money from the Treasury and Federal Reserve, is stagnant. Unemployment is stuck at unacceptable levels. The unemployed do not buy many big ticket items. The American consumer, generally the prime mover in recoveries, is carrying a crippling load of debt. He is trying to get rid of debt not take on new debt. The real income of the average American after factoring in inflation and taxes is on a decline that began before these current difficulties.

There are some rays of sunshine. The market for new housing is beginning to recover from a depression level disaster. However, taken as a whole, the picture looks pretty bad. Yet I continue to invest in the stock market. Earlier this week I invested a small amount of money (about 0.5% of my net worth) in a new position. Was that a good decision or a bad decision? Time will tell. As is my practice, I will continue to share my failures and my victories with you, my readers.

I am currently studying “One Up on Wall Street” by Peter Lynch. It is considered a classic. He begins the book with a warning that sounds a lot like Yoda, “Do or do not! There is no try.”

Peter Lynch, “It’s best to define your objective and clarify your attitudes…beforehand, because if you are undecided and lack conviction, then you are a potential market victim, who abandons all hope and reason at the worst moment and sells out at a loss…Ultimately it is not the stock market nor even the companies themselves that determine an investor’s fate. It is the investor.”

Long ago, I decided I was going to invest in things that I understand. I understand oil. People buy gasoline for their cars. I understand regulated utilities. I am using electricity from the grid to power the computer I use to compose these articles. I understand consumer staples. People buy toilet paper and bar soap no matter the condition of the economy. I understand telephones. I use them. I understand health care. Sick people spend lots of money on medicine. This is a partial list of things I understand, but I think it is long enough for the purposes of this post.

This limits me. I understand that, but this is what I have decided to do.

I understand the concept of a wide moat. Coca Cola has the most valuable trade name in the world. No other company, not even Pepsi Cola has that kind of moat around its products.

I believe good management is terribly important but very difficult to define. I understand results. If I see a consistent sustainable dividend stream, I am inclined to believe that it is generated by the wise decisions of a competent management team that has my interests at heart. That is why I held on to General Electric in 2008. I even bought some more at depressed levels. Certainly not the best decision I ever made but at least I am back to a little better than even. General Electric still has some of the best managers in what is left of American industry. They also have some of those wide moats. There are only three significant manufactures of gas turbines in the world. GE is the largest.

I understand that not losing money is sometimes more important than making money. That is why I hold on to a lot of cash, bonds, CDs, and the like. If the stock market loses 50% of its value (it very nearly did that in the last crash) that would be a personal disaster if all my money was in the market. However losing ½ of less than 50% of my money, while extremely unpleasant would not be the end of the world. Remember if you lose 50% of you money, it has to double (100% gain) just to get you back to even.

In the past I have written about the contract you make with yourself before you begin to invest in anything. Decide who you are. Decide what you are going to do. Decide why you are going to do it. Put it in writing if you need to. Consider any change to your underlying philosophy or fundamental issues of strategy a matter of serious importance that requires serious thought.

And please, let’s be careful out there!

Mark Twain Quote:
There are two times in a man's life when he should not speculate: when he can't afford it and when he can.

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