I’d like to welcome you to my blog and homepage and more properly introduce myself. I’m a student at Yale concentrating in Economics. I began studying the discipline of investing when I was 16, largely to debunk family misunderstanding about what was considered a mystical and arcane field. To that end, I devoured every piece of literature I could find on finance, the stock market, investing, and economics. The process consumed me, and I became borderline obsessed by the countless theories on and challenges of investing.
Through this, I began to understand why most of my family and friends hadn’t a clue on how to manage their own money. With so many ivory tower theories, masquerading charlatans, and foolhardy tidbits of “advice” floating around the financial world, it was clear that just about anyone could get lost in the garbage out there. So, after garnering enough mock portfolio practice and feeling confident enough to actually invest on my own, I put my money where my mouth was. I began managing my own investments at around 17, and have been doing so for nearly four years.
I have started this site with two goals in mind. First, I want to help others obtain a different kind of financial freedom — that is, the freedom to know what the hell is going on with their hard-earned money, for better or worse. And second, I want to share with investors old and young ideas and theories for intelligent investing.
I believe that successful investing does not require great strokes of genius or a high IQ. I believe that with common sense and (arguably) the ability to add, subtract, multiply, and divide, anyone can achieve good, if not outstanding, long-term results. I believe that the most intelligent (stock market) investing is focused on an understandable business at hand, which sells in the market for far less than what it is truly worth. And I believe that all truly great investing is by definition contrarian.
I believe there are three things with which any investor should be fluid.
1. Accounting. While not the most exciting of topics, an investor will never be able to fully understand a company without the ability to break down and interpret its financial statements. The basic principles and mechanics of accounting really aren’t that difficult, and the time required to learn the topic is well worth it. I think checking out these “Investing Lessons” on the About.com website and reviewing the sections on the three financial statements is a solid start.
2. Valuation Methods. An understanding of asset values, discounted cash flows, and (optionally) ratio analyses is the next critical step in investing success. The ability to pin a reasonably estimated value on a company (independent of its current price or what others say its worth) is the cornerstone of intelligent investing. Wikipedia’s entry is a decent place to start (though I am on the lookout for a better source) for discounted cash flow, and I will update this soon with some recommended books on the topic.
3. Common Sense. A basic understanding of the world and what makes customers and businesses tick is essential to good investing. Have it, use it, and embrace it. It’s probably the most important of the three.
I also believe in three guiding principles when putting these skills to work.
1. Stick to what you know. Warren Buffett famously avoids tech stocks for a reason — he does not understand them and cannot reasonably predict where they will be in ten years. My own biggest losses have been incurred when I invested in companies that I did not fully understand. While you think you can spot the next big thing or a cool new product when you see it, chances are you can’t and you won’t. In short, use what I call the KISS principle to help: Keep It Simple, Stupid.
2. Patience. When you make up your mind about a particular company and you’ve done your homework, avoid the temptation to get out because it takes a while before it “goes anywhere.” Since you bought the company at what you feel is a steep discount, learn to love when market prices stagnate, or, better yet, drop. It gives you the chance to buy more of a good thing at a lower price. Your cost basis decreases and your eventual returns increase. It’s not easy to sit there while your darling loafs, but doing nothing is a virtue in the investment world.
3. Never trust your broker. Independence is truly a sweet thing, and it’s a particularly valuable asset in investing. Do yourself and your portfolio a favor: STOP LISTENING TO THE LATEST HYPE AND HOT STOCK TIP! If you have the know-how and common sense, no one can tell you better than you can what is best for your portfolio. Never stop questioning your research and analysis, but never question your ability or sacrifice your independence.
Generally, I seek great companies at good prices or any company at an extraordinarily low price (provided, of course, I believe I can value it). I will also engage in special situations (e.g. merger arbitrage) when the opportunities appear attractive and opportunistic.
I limit the portfolio to just a few stocks, because I believe that focusing on one’s best ideas and just a small number of companies enables one to obtain higher returns with lower risk. Of course, I define risk differently from many academics, who argue that riskiness is volatility or correlation with the market, etc. I believe risk is in faulty research, not understanding what you are doing, and business risk. On that note, I believe “focus” investing helps limit all three of those risks.
I am generally invested heavily in very small companies, though that is merely a by-product of where values tend to hide today. I have no inherent bias for small or large caps one way or another.
I consider myself a value investor, though it should be noted that I do not distinguish between value and growth. I believe there is value in growth, and when it is attractively priced, should be purchased. I think that anything other than value investing is speculative, bogus, or fraudulent in the sense that all legitimate investors should be seeking to buy investments for less than they are truly worth.
I consider the portfolio conservative in the sense that I only leverage it in rare circumstances. Furthermore, I do not short stocks, save for an occasional arbitrage play or hedge.
When it comes down to it, I’m still very much a student of finance and will always be learning and improving. Take everything on the site with a grain of salt
And, if you’re interested, unaudited results for the past two years.
2005: +7.2% vs. S&P500: 3.0%
2006: +28.9% vs. S&P500: 12.8%
2007 (to date): +5.5%
I hope that you will enjoy the site, share it with friends and family, and feel free to contact me at any time with questions, suggestions, or ideas.