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20 Things You Need to Know about Value Investing

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or More random items about what this blog is about than you really wanted to know

This is a reworked article that I posted back when Chroma first started, but no one read it, so it is new information to anyone hanging out now.

What is this Value Investing Blog about anyway?

Since you are at my blog, I will summarize to you what I think is important. This is not a complete list. These ideas are not listed in any particular order. You didn’t go to Gray investing. This is Chroma Investing. Hopefully I can bring a little color to what everyone else seems to think is black and white. There are hundreds of blogs about investing and many have not just different but contradictory ideas. Which is correct?

Figuring out what  is right and what is a load of crap takes time. If you don’t  understand the basics of investing, you will have to learn them. Hopefully that is part of why you are here. And that you like sarcasm. That is a bonus. If I am tired I often leave it out.

Investing Advice from a non Professional

1) Take it slow.  You didn’t learn to drive in a day. You won’t learn how to invest in a week. There will still be good deals whenever you are ready. Don’t invest with real dough until you have worked through the fundamental investing ideas enough so that you know how you want to invest. That means if someone says they have a great tip, that you better get in now, before the market closes in fifteen minutes. Pass. Run away. They may be right. But you won’t be able to figure it out that fast. Unless have already done research on that particular company. And you believe them. And they are right. That’s a lot of “ifs.”

2) as Graham said, you need to make sure you are protecting your capital before you are earning on it. O.k. that is a paraphrase.  And not a very good one, but the idea is right. There are a million ways to lose your money. Don’t jump off the bridge, unless the bungy cord is properly connected. Make sure you are not taking unnecessary risks or being rewarded too low for the risks you are taking.

3) Get out of debt. This is an easy one. Unless you are the next Warren Buffett you will not be making more money from investing that you are paying on credit card debt. Unless you have been able to secure some incredible deal on a loan, you will be burning cash until you get out of debt. That said, even the master Buffett has used leverage ( a fancy word for borrowing) on occasion. If you know what you are doing, leverage is not a bad thing. Used sparingly and fully understanding the risks. Even many of the financial professionals seem to misunderstand the risks involved with leverage. Just ask Nassim Nicholas Taleb the master of explaining risk and probability and how stupid we really are in understanding it. Taleb is at least a week of posts given the importance of his work in understanding down side risk. (Taleb has two great books that are must reads for humans and doubly so for investors. They are [easyazon-link asin=”1400063515″ locale=”us”]The Black Swan[/easyazon-link] [easyazon-image align=”none” asin=”081297381X” locale=”us” height=”75″ src=”http://ecx.images-amazon.com/images/I/41CeS0f8VPL._SL75_.jpg” width=”49″] and [easyazon-link asin=”1400067936″ locale=”us”]Fooled by Randomness[/easyazon-link])[easyazon-image align=”none” asin=”1400067936″ locale=”us” height=”75″ src=”http://ecx.images-amazon.com/images/I/41DKbqY1yVL._SL75_.jpg” width=”49″].

Investing Well Means, Investing Differently

4)  Have fun. Seriously. If you are not having fun investing for yourself, you will probably cut corners on your research, or fail to update your spreadsheet or valuation tools. Or fail to grasp the fundamental principle that investing is a zero sum game. If you wine somebody else lost. If you aren’t having fun, drink good wine instead. Some people are beer drinkers, not investors, enjoy the brew instead.

5)  Be comfortable with the fact that you will never, ever have perfect information about anything you invest in. I am not kidding. This is one of those facts that most people missed in the course of college, or grad school, or kindergarten, whenever they got the best info in their life. You will need to embrace the unknown. If you understand the Macro side of economics, you will miss the Micro side. Many professionals will have a problem with this point. Ignore them, this isn’t their blog.

6) Don’t be afraid to keep your money in cash. If you don’t know what to do, or no good deal presents itself to you- Do nothing. Remember Benjamin Graham- preservation of capital first. Be Patient and be confident in your choices. Then change with new information.

7) There are always deals to be had. Sometimes they are good, sometimes they are great. Sometimes they suck donkey. Go for the great ones. If you can’t find anything that looks great to you see point Six again.

8)Don’t be afraid of annual reports. Annual Reports are like [easyazon-link asin=”0071448209″ locale=”us”]Security Analysis[/easyazon-link] [easyazon-image align=”none” asin=”0071448209″ locale=”us” height=”75″ src=”http://ecx.images-amazon.com/images/I/51jk-rpndQL._SL75_.jpg” width=”49″], everyone says they read them, but few people do. Apart from the numbers most of the good stuff is the gems that tell you to run the other way. Good info and sometimes they put right there for everyone see.

What Makes You Different as an Investor?

9)Develop an investing strategy. Listen to everyone you can read. I will expose you to a bunch of great sites and books and investors. Take it all in. Then figure out what makes sense to you. If it doesn’t make sense you dump it. It doesn’t matter if your neighbor Tom has made a killing in Apple stock. If you don’t understand how he did, or if you understand but, it doesn’ add up some how, then find another strategy. Your goal is not to be like other investors but be better. Your goal is to make money.

10) Know what your edge is. Warren Buffett has said stay in your circle of competence. To me this means that we all have special knowledge and talents. Get some self knowledge and decide how that gives you an edge. Low volume penny stocks for example can be an edge for small time investors over mutual funds. IF you can’t stand all the detail pick an investing style that doesn’t involve combing through boring reports.

11)  if your investment has a looming catalytic event or person, or group. Pat yourself on the back.  I like catalysts like liquidation. It helps develop a time frame for your stock investment. But don’t count on it.

12) Make sure you have an Roth IRA. Remember if you do well in investing you want to keep your profits. I love the USA, I just don’t want them taking all my hard earned investment profits.

Buffett is a Genius but you Can’t be Like Him

13) Buy and Hold forever isn’t an investment strategy. Buy and hold is a great strategy for Berkshire Hathaway, the corp that Buffett runs. They are huge and you can’t move ships that big, very quickly. But the nimble small time investor needs to be clear when an investment is good to buy and when it is good to sell. Buffett didn’t follow his own advice when he was younger and had hedge fund like partnerships. See tip ten again. What is good for Buffett now is not necessarily a good deal for a beginning investor.

14) Don’t deworseify your investments. Peter Lynch coined the term. Stick to your good ideas. No small time investor should own 40 stocks. You don’t have time to track that many companies actively. Time is of the essence.

15) Do not dollar cost average. This is an idea so patently stupid it must have come from the same geniuses who gave us the Effecient Market Theory. Why would anyone invest in anything when it is clearly overvalued? Bet big when the deal is good, stay out when the deal is bad.

16) Research companies in advance. Have a watchlist of companies you might be interested in buying at the right price. Have a buy in price. If the price drops unexpectedly, you will be ready like a vulture to swoop in for the kill.

Be a Contrarian Investor

17) Falsify First. Don’t sprint into trying to prove your latest, greatest theory is correct. Try to disprove it. Take a shotgun to it and try to fill it with holes. Karl Popper would be happy.

18) Don’t follow the herd. Really. There are a lot of stupid people investing. They are not stupid because they lack intelligence, but because they lack the courage to be different and discover for themselves what is a good investment strategy and a dumb one.

19) Consider some form of mechanical investing. I know this takes some of the ego out of the investing process. But really, would you rather have a fat investment account or take credit for the intelligence of all your investing ideas. (Yes they are often mutally exclusive) Wait, most of you are answering the wrong way.  The right answer is get out of the way of your investing decisions and make money.

O.k. so maybe that wasn’t 20 things about value investing, but it is close enough. I think I said everything I needed to say with this blog. I guess I can retire.

Disclaimers: If you go to Amazon and buy a book I am hocking, I get a tiny, very tiny commission. You will have my gratitude and you can feel good knowing that you have supported a worthy cause: this site. I am not a professional investment advisor, you shouldn’t follow anything I say or even what professional investment advisor says without checking it out yourself. This is the internet. Its mostly all crap.

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