Apprenticed Investor: Bite Your Tongue

Wednesday, May 18, 2005 | 10:00 AM

Tscm_1The latest "Apprentice Investor" column is up at  It looks at the "10 worst things investors say," (part 1). Alternate title: Highly ineffective habits of modern stockholders.

Here's an excerpt:

1. 'I love this company.'

This is the statement that gets investors into more trouble than any other, and here's why: You are not buying a company -- you're buying stock in a company. There's a universe of difference between the two.

Warren Buffett of Berkshire Hathaway (BRK.A) buys companies; Cisco Systems (CSCO) CEO John Chambers buys companies. When Jack Welch was running General Electric (GE), he bought companies. Mere mortals such as you and I -- we only buy stock.

It is arrogance to imagine you are purchasing anything more than a one hundred millionth of an ownership stake (or less) in these firms. The action of that equity is much more important to you as an investor than your personal affections for the entire company.

Microsoft (MSFT) is a good example of this -- in 2002, you could have paid as much as $35 (postsplit) or as little as $20 per share. It's still the same company, but at the recent price of $26, one buyer is up 30% while the other buyer is down more than 25%. Same company, different entry prices for purchasing the stock.

That's why pricing and timing are so important.

Loving a company will not make up for a bad buy. Unlike VCs and corporate chieftains, we don't get to buy business models.

Part I discusses the first 5, which include:

1. 'I love this company'
2. 'I am a long-term investor.'
3. 'I just heard on CNBC (or CNN or Bloomberg) that...'
4. 'I don't want to pay capital gains taxes.'
5. 'I'm waiting for the stock to come back to break-even.'

I'll cover the next 5 next week. They include:

6. 'This Stock looks cheap down here . . .'
7. 'This fund did great last year.'
8. 'I’m a Bull" (or "I’m a Bear")'
9. 'I don't want to take a loss.'
10. 'I’ve got a great stock tip . . . '

Prior columns can be found here.

Wednesday, May 18, 2005 | 10:00 AM | Permalink | Comments (2) | TrackBack (0) add to | digg digg this! | technorati add to technorati | email email this post



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I think the most overused one I've seen among my friends is #5. I think they're a little crazy for not just investing in what will earn them the greatest return (in their best estimation). Even if that stock that's down 20% finally makes it back to even in 2 years... You'd be better off finding something to get you 30% in the same time-frame... and often get some short-term tax benefit from the loss as well.

I think the true evaluation on whether to keep a stock that is down and hurting is: If you currently owned none of it, would you sell any of your top performers to buy it at the current price? If yes, might as well keep it... If no... why the heck do you still own it; And maybe, why did you buy it in the first place? (I suspect the answer to this one is any of 1,3,7,10)

Posted by: Chad K | May 18, 2005 11:49:21 AM

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