checklistinvestor.com Blog

I know you are busy, and I know its hard! But before investing in a stock, try writing a report similar to our ‘Stock of the Month’ report. For every stock you own, you should be able to explain, in detail, why you own it. And just saying “because I think its going to go up”, is not a good answer. By writing down your detailed reasons for buying, you have a historical document to review when it comes time to sell. Many investing strategies say you should sell when your reasons for buying are no longer valid. But, if you don’t document your reasons for buying, then you can’t know when to sell.

Teachers will tell you the best way to learn about something is to teach it. You will force yourself to learn the details about a company by writing about it (and letting a few others read it).

As a resident of Dallas, and a big Mavs fan, the NBA finals were quite a dissapointment. The Mavs lost a series there is no way they should have lost. Some of the key reasons for the loss:

1. Extremely poor officiating. This cost the Mavs Game 5, and possibly Game 6. The NBA has unofficial rules that so called “superstars” get special treatment from the refs. This was true with Michael Jordon, and became very true with Dwaye Wade, Miami’s best player.

2. Key shots made by unexpected players. Gary Payton scored only a few baskets in the entire series, yet won Game 3 on a last second shot, and had a huge bucket late in Game 5. In Game 6, Posey had not made a shot, yet hit a 3-pointer with about 1 minute left, just after Jerry Stackhouse had missed a 3-pointer for Dallas…this was a 6 point turnaround.

3. Shaq hits 2 free throws, and Dirk misses one…who would have thought? Shaq is a 50% free-thrower and Dirk is a 90% shooter.

4. Devin Harris plays extremely poorly on offense. Coach Avery Johnson is hesitent to replace him with Marquis Daniels, and when he finally does (in the last game of the series), Daniels scores 12 points in the last half of the last game, providing a big spark to the Mavs. Why stick with a player that is performing so poorly.

How does this all relate to investing? In two ways. The first is overconfidence. The city of Dallas, and almost all NBA experts expected a Dallas victory. It turns out this was not the case! As an investor, even though you are fully confident in your investment choices, things may go wrong. All investment “experts” can and will be wrong at some point (including me, of course).

The second is unexpected events happen. Even though a sequence of events is unlikely to happen, if the probability is greater than 0, sometimes they do happen. The sequence of events that led to Dallas loss, poor officiating, big shots from unexpected sources, a terrible free-thrower hitting, while a good one misses, and a refusal to change substitution patterns all combined to lead to an unexpected result. Keep in mind that unexpected things will happen to the companies you invest in. The best way to handle this is to be prepared. Try and envision various outcomes, even if those are not favorable to your investment position.

There is probably some lesson in cutting your losses (Harris), and trying a new strategy (Daniels), but that would really more apply to an investment choice that is running up against a timeframe deadline. Not really for the long term investor. I’d expect Harris to play better next year (long term), but that was not relevant to a time-bound series (short term).

Every individual investment should be evaluated on its own merits. However, some sources are good starting points to begin your investigation.

1. Stock Screening tools. These tools provide a list of stocks that meet a certain numerical metrics, such as low P/E ratios. There are several free screeners available on the internet (Yahoo has one).

2. List of stocks from pre-defined screens. Smart Money and the Wall Street journal publish the results of more complicated screens (take into account more metrics). The AAII also has several pre-defined screens that are based on famous investing strategies. These are a good starting point.

3. News related to companies you already follow. Often news items refer to other related companies involved in the story.
4. Headline news about particular companies that seem interesting.

5. Companies that are in the industry that you work in. You knowledge of the industry could be a big advantage in evaluating investment opportunities.

6. Companies whose services you use. Fox and the Hound is one example (a prior stock of the month) that was selected after having a few beers there, and doing some research to see if it was public company.

Investment ideas are all around you. Once you get an idea, follow up on it. Document the idea, and begin to do your research. I create a special transaction “Stock Ideas” in Checklist Investor to track companies I’m researching. This allows for quick viewing (click on Transaction tab to see only those transaction types).