The Deipnosophist

Where the science of investing becomes an art of living

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Location: Summerlin, Nevada, United States

A private investor for 20+ years, I manage private portfolios and write about investing. You can read my market musings on three different sites: 1) The Deipnosophist, dedicated to teaching the market's processes and mechanics; 2) Investment Poetry, a subscription site dedicated to real time investment recommendations; and 3) Seeking Alpha, a combination of the other two sites with a mix of reprints from this site and all-original content. See you here, there, or the other site!

13 July 2010

Investment ideas

I often receive the question, "Whence come your investment ideas?" (Well, the question is phrased not precisely like that, but its objective is the same.)

Of course, all investors share the same well-spring, the public markets. (Private equity and venture capital, to name only two other investment markets, obviously have different characteristics.) Styles abound, but two predominate: value and growth. Value investors seek to purchase $1 of assets at a present day discount. Growth investors seek to purchase $2 of future value based on presumed continued growth for today's $1 present day price. (Simplistic definitions, these.)

From that starting point, the layers of complexity begin; for example, Warren Buffet melds growth and value into a unified whole, although he leans toward value. He ignores the technology sector altogether, partly because he claims not to understand it, but also, I believe, due to its tendency to have torrid growth... that does not endure beyond a few years, which does not comport with his time frame. (A crucial point.)

But the complexities become even more boggling for the investor: With so many possible investments, which to select? Rule out one style (for example, select growth, or vice versa), and then limit your universe only to growth stocks. Great, that leaves ~20,000 stocks. Now what? Penny stocks or institutional stocks? A bet on growth is a bet on the future, and because the future is unknowable, each asset class enjoys equal opportunity to succeed. (Well, perhaps in an egalitarian universe.) Filters would be of use: a minimum number of shares traded daily, a minimum share price, whatever. Or William O'Neill's CANSLIM.

Your objective is to:
1) Identify the leading theme for the market's next up leg;
2) Whittle the list to a manageable few;
3) Know, really know, those few companies that pass your filters;
4) Know, really know, the often subtle tells of each stock's trading action 
that are precursor to big moves in one direction or the other, which you could identify because you do not monitor a list 100s of names in length.

What you do not want to do:
5) Buy old names. A former growth leader that no longer grows is no longer a leader, and its shares certainly will be no leader; avoid it like the plague.
6) Buy yesterday's cycle's winners. Why purchase for your portfolio an investment that has a ceiling as to high it could rise? 

(These two items are similar, but not the same.)

Investing is difficult (enough); you, as investor, are presented with multiples of reasons why you should not buy, or not hold, your winning leader of an investment. So you do not buy, or you sell, or worse you trade out of it. ("I will re-purchase on the dip." A dip that never comes.) Why complicate matters? Find your core truths, simply expressed as your investment objectives and risk tolerances ("To make money!" is insufficient), and then the investment style and asset types you prefer, adjust the filters to your liking, and then enjoy some measure of success.

Slightly more to investing than this simple, simplistic bit, of course, but it is a good beginning.
-- David M Gordon / The Deipnosophist


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