Investing Tourism

If you don’t know who the patsy in the room after 10 minutes, it is probably you. Source: A lot of people…

For two years, I was the patsy.  I lived in Germany from the age of 19-21.  By the end of my two years, I spoke fluent German, but the cultural and historical “inside jokes” just slipped right by me (think, “The Curse,” “I am not a crook,” and “Drill, baby, drill”).  You know the feeling, you laugh, smile, but you have no idea why everyone else is laughing.

A similar situation occurs in investing.  In some circles, people call this tourism.  For example, the current tourist destination is energy.  If you are new to the energy world, and picking up your first 10-k on National Oilwell Varco, Seadrill, Transocean, Atlas Energy, or another energy-focused company in the past few weeks, you are probably a tourist.  The lure of the company that is down 20, 30, 40% is too strong for most people too resist.  If you are brand or relatively new to an area, such as energy, you are probably going to miss a few inside jokes.

I still believe going through companies alphabetically is the best way to find good companies.  It has the following benefits:

1. You can decide irrespective of value, price or who else owns the stock, if you think you can understand the business.  Chicago Bridge and Iron, a holding of Combs/Weschler is off 50% in the past year, but it could be off 99%–I could never understand that business.

2. You don’t suffer from anchoring bias when deciding whether it’s attractive.  I can’t tell you how many investment pitches start out with some variation on the phrase, “It is down X% in the past 12 months.”  Working alphabetically lets you come to your own valuation without reference to past prices.

3. It allows you to keep the proper perspective on timing.  A good idea will come around multiple times in an investment career.  You don’t have to chase what’s hot now.  Think crocodile, not bumble bees…

This investment screen will never be found in a book on the Top Ten List of the NY Times or in a Factset or Morningstar screen.  Why?  It is just too hard.  It is slow and actually takes patience.  There is no magic formula.  Or magic screen.  Also, it is freely available.  Russell’s website provides the alphabetical list of their indices.  This reminds me, I should update my investor pitch book to include my “proprietary investment screening tools.”

If you still want to invest in energy, my tip would be to read The Frackers.  It is a great book and will shed some light on an industry that, in my opinion, is made up of a lot of naked swimmers, hoping the tide doesn’t go out before they can sell their company…

 

 

 

 

 

 

 

bumble bees vs. alligators…

 

If you just picked up the 10-k of an energy company, you are probably the pansy.

 

More to Explore

Returns for Great vs. Bad Businesses

Munger and The Cattle Rancher

Munger’s ability to find great businesses is directly related to his ability to consistently discard bad businesses. He is excellent at inverting, and discarding the bad businesses as quickly as possible.

The Abominable No-Man and Bad Management

Some investors think a business is good, but know that management is bad.  These investors justify the investment based on the idea that the great price of the business is worth the bad management. This is akin to marrying a supermodel who is going to yell at you all day.  Whatever pleasure your eyes may derive from the marriage, your ears will endure a greater amount of pain in the long run. The pocketbooks of those partnering with bad management are likely to see a similar 50%+ decline in their net worth.

This Post Has 2 Comments

  1. Nice post.
    Going through the companies starting with the A’s was perfectly fine back in the 1950’s. There were big books organised as such.
    These days we can review results by date, as issued. I manage to cover the entire stock market over a year (I’m in the UK, possibly less practical in the US).
    ps – I think you mean ‘Patsy’:-)

    1. Soicowboy: Thanks for the catch on patsy/pansy. I have updated it.

      As for the A’s, I use the Russell 3000. It might not be the most complete list, but I think it gets me pretty close. Also, once you start researching a specific industry, you can usually find any competitors that may not show up in the list.

Leave a Reply

JOIN THE SOVA GROUP DISTRIBUTION LIST

Close Menu