Wednesday, April 15, 2009
(Cont'd from above)...

Jim (cont'd):   

They go in without a plan… they think, that was easy… they invest not like intelligent sane people trying to make money… but like gamblers… and not good gamblers like those guys at MIT who figured out to count cards at Black Jack and made a fortune… but your average run of the mill gambler… who loses all his quarters at the slots… it is not even betting… it is not random, it is not all touch and go… you have to make plans and stick to them… at least until the fundamentals change… because if you don’t I am promising you, I am guaranteeing you that you will lose money… it is all too easy to let the market panic you… or make you over excited so that you make a mistake… selling when you should be buying… or buying when you should be selling… how to we avoid that… that is this show.

The key to successful investing, successful trading, successful anything is that you need to know yourself… I know I am sounding a little like my friend buddy pal Dr. Phil here… or Oprah… or maybe a Zen monk… even though I am probably the least Zen person in the world… or at least in North America… but it is true… you have to understand what you are doing… you have to understand why you are doing it… you especially need to know why you have certain bad habits… boy, we cut those back we make big moolah… because everybody does… everybody has bad habits… we got to know in order to avoid them… you need to set goals… you need to stick to the plans that come with those goals… and most importantly, stop lying to yourself… you need to be brutally honest about your stocks… I am telling you this is one of the hardest things, this is the hardest part of investment… because if you own a stock that is down, even if you know that it is a bad stock… I know you, you will desperately try to put off… sell, sell, sell… to wait until you are, yes the biggest crime, back to even.

If you have that problem… you have got to acknowledge it… cover up the prices of where you bought your stocks… I am not kidding… white them out… cover them up… this is a great exercise… that way you can make an intelligent rather than an emotional decision on what to do next… cause then you won’t know, you will look at your basis… it is called a basis and say oh my god wait until I get back to even… it will just be cold and calculated… it goes farther than that… when you buy or sell a stock you need to know why you are doing it… you need to have a good understanding of why you think that stock will go up… if you are just buying something because Cramer told you to buy it, well, that is no good… tips by the way are for waiters… I am not trying to tell you what to buy or sell like you are some sort of automaton on this show.

So what is a trading thesis or an investment thesis that is worth acting on… let’s take a moment to distinguish between the two… investments, write this down so you get this… this is really important, because people confuse them all day… investments are long term… you think a company has a long term growth stock, Berkshire Hathaway, you can explain how that will come about… and maybe you will hang onto the stock for 18 months… you need to be able to tell me why the company is going to do well over a long period of time… being in a good sector, not enough… there are a lot of companies in good sectors… maybe you like the dividend, or the dividend policy… maybe you have confidence in management… maybe the company is best of breed, it consistently beats estimates and beats its competitors… those are all part of what makes a good investment thesis… understand why the sector makes sense in this environment… understand why this is the best play in the sector… the best house in a good neighborhood.

A trade is totally different… nothing to do with investing… all to do with short term discipline… remember, you never turn a trade into an investment… you put money into a trade because you expect a short term catalyst to raise the stock… maybe you expect a company to raise earnings estimates in the near term… or you expect an analyst upgrade… you buy before that happens and then you sell after the event… you don’t hold on longer after your thesis has been validated… you cash out… when you think trade for now on I want you to think this sound… cash register… and yes, it takes a lot of homework to get to the point where you can have this kind of thesis… you need to understand a company if you are going to go saying that it will be making more money than we expect… you can’t just say, one of my friends told me, I have got to go buy Ultra Financial Corp… come on.

So you need to know what you are doing… you need to be clear about your expectations… but what if you are wrong…look, in this business if you are wrong only 40% of the time, you are the best there is… that is why we diversify… because we expect that we will be wrong often… it is human… we are human… it is just part of the risk associated with investing… and it is fine as long as you are mostly right… but when you are wrong… you absolutely must admit it and cut your losses… don’t give yourself the benefit of the doubt… we are not deserving of it… we are human… and always reevaluate your investment thesis… if your thesis is wrong, again human people make mistakes, if your thesis is wrong, if your investment is not working like you thought it would… you need to sell the stock and find something new… do not be afraid to admit that you are wrong… you have to be eager to do it… or you are just going to hemorrhage money.

Here is the bottom line…

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The Bottom Line!:     If you are honest about your expectations… if you are clear about your plan… and willing to abandon ship the moment that the expectations or the plan get discredited… then, and only then can you make yourself a lot of money… if you can’t be honest with yourself… you are not going to make a dime... Know your expectations, make a plan & then stick to it in order to make money... Here is the main take away… I want you to know yourself… be honest, and be clear about your expectations.

[verbatim recap]

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Jim went on after this segment to take questions from callers, and responded with his comments...

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Q:    I am wondering about how I should start investing as a junior in college?

Jim:    Well, I think that what you want to do, and I know that this is antithetical to what people read in the books… but a junior in college, let’s think about all of the years that you have ahead of you to be able to make a lot of paychecks… a junior in college is someone who take so much risk, that you really want to… I don’t want to say roll the dice, because that immediately sounds like gambling… but what you have got to do, is you have to find some growth stocks that could be big… think of it like this, in 1982 if invested in Home Depot and Comcast, these were not blue chips, these were not even considered great companies… they were not fly by night… but they were early growth stocks… find yourself 5 early growth stocks from 5 different sectors… maybe bio-tech, maybe technology, software, maybe hardware… maybe technology for oil and gas, just get a couple of… a drug company… get a couple of great, great growth companies… and then sit on them… and add to them as you get older… because you can take a chance.

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Q:    I have about $30,000 in an IRA, and about $10,000 under my mattress. And I have heard you say a couple of times that I should set some cash aside. Do you literally mean cash? and what percentage of my portfolio?

Jim:    This is one of those know yourself things… when we have uncertain markets, what people have to do is say, will I panic if the market is down say 500 points… and you have to think for yourself, and say you know what, this market could be down 500 points in a heartbeat… that is not for me… so what I am going to do is maintain a 20% cash position… if you think the market is about to crash at all times… then you maintain a 40% or 50% cash position… or you don’t own anything… here is the issue… no 20 year period has stocks underperformed… I think that is work which I got from Jeremy Siegel, the great warden professor… that is on a saleable work… so I like to have people in some stocks, because it has been the best producer of wealth… but I do believe, know thyself, you can have up to 50% cash in your 30’s, 40’s 50’s and still be in my game plan… if otherwise you would freak out and sell at the bottom.

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Q:    You teach us how to buy stocks. You taught me to look at a companies cash position, their debt ratios, price to earnings, all their competitors. You taught me how to do the research, so I do the research, and then I rely somewhat on these big time brokerage firms, these banks and the market managers and what they say about the stocks. No names, we know who they are. Market perform, hold, underweight, buy, buy, buy, sell, sell, sell, I think that they are just pirates and they are only in it for themselves.

Jim:    I am going to disagree with that… I think that a better analogy is to the NFL, there is a lot of journeyman, there is a couple of stars… what I can bring to the program is that I know who the stars are… if you just go to a football game, and you have never seen one… or you go to a baseball game, and you have never seen one… you think that all players are created equal… and you think that they are all a bunch of show boats… and that is what people feel about Wall Street… in truth, there is some 350 hitters… in truth, there are some guys with a good quarterback rating… in truth, there are guys who drop the ball before they cross the goal line like a bunch of jerks… but I know who they are… and I wish that I could teach you who they are… and maybe one day I give a seminar or do a show about who the best analysts are… because they are not all created equal.

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[verbatim recap]

[end of segment]

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