Guest Post: Do Something!

Guest Post: Do Something!

I spent Easter at the beach, getting away with my family and we enjoyed the company of a bunch of friends. The smallest children all like to build sand castles at the very edge of the dry sand where it becomes moist and pliable. Of course as the tide comes in they are constantly being forced back lest they find their monuments suffer from each mini-tsunami. Investors build their portfolios well back from the high tide mark and the relatively safety gives them the ability to gain perspective and see the tides for what the are.

In this Guest Post, Scott Green explores the merit of sitting further back and doing nothing.

Doing nothing whilst doing something

A value investing strategy requires discipline and patience over a long period of time to work succesfully. You can’t just be a value investor one week then jump to speculative investments the next and expect that the preservation and growth of capital over the long term will be adequate. Patience and discipline are linked inexorably and will take work to develop.

If you are anything like me you struggle with the urge to do ‘something’ in the market even when there is no real value to be found. As the days stretch in to weeks, the itch can become very tough to control and sometimes you just have to do something to alleviate the pressure. This is especially prevalent in markets that seem to be continually rising. You can think you are missing out even though your investment rules and/or Skaffold tell you that nothing is value. You can eventually ‘snap’ and relax your rules and trade, justifying your decision to yourself in any number of ways. Conquering this itch is an important step to becoming a succesful long term investor.

Doing Nothing

One of the key aspects of value investing that Roger has mentioned many times is switching off the stockmarket and focusing on businesses and investigating promising businesses for potential investment. However, in todays 24hr news cycle with information flying at you from every different angle it can be hard to completely switch off. Below I have detailed some steps that I have taken in my personal investment journey to reduce my exposure to the news cycle and also modify the way I do view items when I interact with them. Maybe they can assist you in your in you investment journey.

1) Keep your ‘value goggles’ on – When you do read a business article or watch an investment show, view it all through the prism of what you have learned in Value.able or elsewhere. You will be amazed at how simple it can become to quickly identify whether or not the relevant piece is helpful to you or of no value. You can save a lot of time reading the financial news if you avoid all the articles that involve speculation rather than investing. A healthy dose of skepticism probably goes hand in hand with the ‘value goggles’.

2) Avoid living on the business channels, websites and newspapers – Reading or viewing articles on the many available sources of business news is not itself unhealthy but, like fast food, living on it probably is. The popular image of the ‘investor’ is the man (or woman) in their office, big screen showing stockmarket prices and a fast paced business channel, a copy of some financial paper and a website screening the market for the latest breaking news and trends. As investors, we should use the media as a source of information but not allow it to dictate to us what we should or should not be doing. Of course, if Roger or a trusted value investor (Buffet, Klarman, Whitman etc.) is appearing on a show or writing an article that should be required viewing/reading.

3) Do not constantly check the stockmarket – Some people (I used to be one of them) know where the stockmarket is sitting at any given time throughout the day. They also know where their own portfolio sits in relation to this. They live and die every hour of the day depending on whether they are ‘up’ or ‘down’. As longer term focused investors, day to day fluctuations should be of no concern to us. You will find yourself a much more relaxed person if you track your portfolio once a month instead of once a day. To aid in this, avoid using the many free portfolio tracking services available on the web. Perhaps the biggest step is deleting the apps off your smart phone that will happily tell you how much you are worth every second of every day from anywhere on the planet. I found this the best thing I ever did in regards to switching off the stockmarket and controlling the ‘itch’.

Doing Something

This does not mean that we sit around in a vacuum waiting for ideas to just come to us, trade and then return to the void of nothingness. Instead, we replace the actions that hinder us with the actions that will assist us in our investment journey. These are some of the things that I do which progress my investment journey without inducing the urge to act.

1) Read good books on value investing – Many of us got our start in value investing through Value.able but there is a world of other great value investment books out there that can enhance your knowledge. The grand daddy of them all is, of course, Security Analysis by Benjamin Graham along with its easier to read brother The Intelligent Investor. Others I would recommend are Margin of Safety by Seth Klarman (if you can find it or afford it!), The Agressive Conservative Investor by Marty Whitman and You Can Be a Stockmarket Genius by Joel Greenblatt (Terrible title but the last word on special situations value investing). You should also read some of the books that detail specific situations, usually ‘investments’ that went wrong! Examples include When Genius Failed by Roger Lowenstein about the rise and fall of Long-Term Capital Managment, a hedge fund that collapsed spectacularly in 1998, and Liars Poker by Michael Lewis about the authors experience as a bond salesman at Salomon Brothers in the late 1980’s.

2) Read investor letters by trusted value investors – The annual shareholder letters of Warren Buffet are considered required reading by all in the invesment community but there are many others that are valueable sources of learning and, sometimes, ideas to pirate away and research some more. These can commonly be found on the websites of the respective investment funds, though there are other websites that collate the information. Also, they can sometimes get there hands on the more hard to find letters from the more private funds. The ones I like are Marty Whitman from Third Avenue Management, Seth Klarman of the Baupost Group and David Einhorn from Greenlight Capital.

3) Research companies – Probably the most important something you should be doing. Using Skaffold or other sources to generate ideas leads in to researching thses ideas to see if they are worth investing in. Indeed, most of my own ‘investment time’ is taken up reading company reports and balance sheets. some can be quickly dismissed as unsuitable whilst others will, after suitable research be deemed acceptable and join our portfolio. The research of companies is the heart of value investing and the only way to ensure that investments are made below intrinsic value and with a margin of safety.

Hopefully, the above ideas will assist you in your investment journey as the have assisted me. THey have helped me become a better, more disciplined, more patient and much more relaxed, investor. A soothing balm over the itch if you like.

Guest Post Author: Scott Green.  Posted by Roger Montgomery, Value.able author, Skaffold Chairman and Fund Manager, 18 April 2012.

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Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.