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July 05, 2005
Key to investing -- Forget About it
I spoke recently with Tom Taulli, co-founder of CurrentOfferings.com (a web site with information on private placements and other corporate stock offerings) for a story I wrote called, "The Get Rich Slow Scheme."
Tom and I discussed how investors have to take risks if they are going to make serious money in the stock market. But they don't need to take big-dollar trading risks. Rather they should make small, calculated bets and hope that about one out of 10 pay off. That's how venture capitalists make their money.
I included that tip in the story. But Tom also shared an anecdote that ended up on the cutting room floor -- perfect fodder for this blog.
Taulli observed that some of the people he knows who have made the most money on a single investment were folks who had forgotten they bought the stock in the first place.
For example, Tom recently ran into an acquaintance who made an early investment in an Internet start-up years ago. The company had struggled in the dot-com bust and the owner of the shares stopped bothering to check the stock, which got down to as low as 22 cents a share in late 2000. In fact he forgot all about it.
Tom bumped into him recently and mentioned their shared investment. The guy said he assumed the company had gone belly up. Not at all, Tom corrected him. The company, now known as j2 Global Communications (JCOM), was doing great (it currently trades at around $35 a share). Tom estimates that his friend's $5,000 original investment had grown to $100,000 without him even realizing it.
Sure, the guy got lucky. But stories like that make a good case for buying and holding -- especially when you're taking a flyer on a risky start-up.
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Buying and forgetting about it may be a useful approach for some people, but it it is not what I have found successful in investing and probably is poor advice for most investors.
The first step to successful investing is determining which stocks to purchase. One could, I suppose, make a wild purchase of some "shoot the moon" penny stock and then forget about it.
I prefer to buy stock in companies with recent price appreciation, strong latest quarterly results, steady five-year results in the form of both revenue and earnings growth as demonstrated on Morningstar.com financials, growth in free cash flow, and a nice balance sheet.
You could consider that I am somehow "loading the deck" by picking these strong stocks. I hope so!
Within a portfolio, I sell quickly at losses and then slowly at gains, biasing my ownership to stocks that are performing. I never put them away in a closet, shut my eyes, or stick my head in the sand! I have a plan with my investments, and I know what to do when the price or the market changes its valuation.
I think that is the way to approach purchasing stocks. Have a plan about which stocks to buy and have an idea about when to sell those same stocks.
Posted by: Robert Freedland at July 6, 2005 12:49 AM
I agree with Robert. As Jim Cramer says, the relevant phrase is not "buy and hold," it is "buy and homework." If you have lost all confidence in the growth prospects of a company for the foreseeable future, it is best to get out of that position and put the remaining money to work in a better company.
Posted by: Ankur Parekh at July 7, 2005 02:32 AM