Well. Logic Errors run rampant.
By
Glen Bradford
For example. Back when kids had to walk up hills both ways to get to school in the snow and kids ate ice from the ice man off the street (the good old days), it was financially savvy to buy larger lot sizes of shares (you paid for the volume as opposed to a flat fee). My grandma has a couple rules that she inherited that will in my opinion prevent her from taking advantage of steals. One of them is she refuses to buy overpriced companies. She likes them between $10 and $50. So, I asked her if she wanted to buy a share of Google for $100. “No way. That’s too expensive.” How about a share of Berkshire for $200? “What are you Glen, crazy?”
My dad likes to hold on to losers in the attempt to “wait them profitable.” To me, here’s how I look at things: I have two companies. One I own, one I don’t own. The one I own is down 50% from its high and I feel like crap. I just lost 50%! The one I don’t own is down 95% from its high and upon further research, indicates that business still exists and is growing, where my one that is down 50% is kind of taking a beating on the business side too. Now, from my dad’s perspective, selling the one down 50% is a fools game. From my perspective, not reallocating into the steal is a fools game. The side note to this is that when you see a lot of people selling a stock, the goal is to get ahead of where the money is heading at any given point in time. It’s really hard to predict this, but if you see your stock getting hit by a steaming locomotive, a speeding bullet, and getting jumped by Wall Street’s hoodlums like a girl scout’s cookies at fat camp — you might want to get out and get back in at a lower price.
Human behavior loves trends. You see this traditional cycle where somehow stock analysts continue to have jobs of forecasting what the stock price used to be by using a little less logic and a little more of what the stock price is now. Don’t fight the trend unless you believe you can keep aliens from reading your mind by wearing aluminum foil around your head or predict the stock market cycles by using solar cycles or astrology.
Size matters. Everyone loves talking about large companies. They have the most shareholders. The largest companies in the world probably can’t double in size as easily as the smallest company in the world. For example, I don’t see Exxon Mobil doubling in size as easily as the one-man barber shop down the street. Heck, the guy could call my sister up and have a floor sweeper in about 10 minutes and have doubled his work force. I see no reason to own these touted companies at their higher prices. Look at most investors portfolios (if you can peek past their mutual funds). What do they own? This large cap garbage.
Jeremy Siegel has empirically proven numerous times that stocks outperform most everything in the long run. My mom can’t stop buying gold. I didn’t care really — until I found out she was selling my most undervalued holding because it was up 50%. Even though I tried really hard, she seemed incapable of understanding how selling a company at less than half of net cash (cash – total liabilities) to buy gold (paying 20% of the cost to brokerage fees) not only seemed like a ridiculously more risky proposition to me, but also in my opinion was getting nothing for something.
What’s with this “playing with the house’s money” garbage? I called up the “house” and they confirmed that it indeed was my money. This is a logic error at its finest. You should always allocate your portfolio to maximize your returns. Convincing yourself you’re playing for free, when in reality you are still playing with your own money is pretty much the dumbest idea that everyone at wall street loves to propagate.
Well, that’s a pretty good snippet, don’t-cha think?
Glen
From: Jon Slotnick
Sent: Monday, May 11, 2009 12:48 AM
To: Bradford, Glen Richard
Subject: Re: New Dragon Asia?
P.S. What are “old-fasioned rule mechanisms?”
On Sun, May 10, 2009 at 9:44 PM, Bradford, Glen Richard
Jon,
I think it’s a bargain, just don’t own any — I sold out. I will buy back in if it turns a profit and is still cheap. There are less risky more profitable ideas out there.
Hope this helps, convincing my father to sell out was a pain in the neck. He doesn’t like to sell at a loss. There are a lot of old fashion rule mechanisms that I’ve been jotting down so that I have some good material for an article once I get enough of them.
Glen
From: Jon Slotnick
Sent: Monday, May 11, 2009 12:25 AM
To: gbradf
Subject: New Dragon Asia?
Dear G.B.,
I read your blurb on NWD and am holding 30,000 shares @ .17. Not sure if the company will stay afloat after Friday’s 10-Q, or actually is a bargain at these prices. What do you think?
Thanks,
Jon