When I started investing in stocks, I had a very vague idea about why I should buy a particular security. I did not know that serious investors analyze the companies before investing in them. Even though I lacked fundamental valuation knowledge, I still bought stocks, based on news.
Luckily, and only because of divine intervention, I did not lose money. In fact, the more I learned about security analysis, the more money I started losing.
This paradox made me think hard about the quality of the things I was learning. As I dug deeper into the specifics of security analysis, I discovered my mistakes and corrected them.
All in all, in my first 16 months of investing, I had made 12 Buy trades and 16 Sell trades. My average gain per trade cycle (Buy-Sell) was 20.6%, and my cumulative gain was 329.2%. The problem was that I did not know if these numbers were good or bad.
Then, one sunny day, I started to get a funny feeling. As I spoke to friends about their investment choices, I realized that all of them invested on news, the way I used to invest. But, unlike me, they were either losing money, or not making any. Also, I was hoping to get some perspective on my numbers, but I found out that there was no point in asking my friends because any gain bigger than 5% sounded like a miracle to them.
What is a man to do?
After thinking about it, I decided to do what the wise men do, namely, measure myself against the best. So I pulled the records of Buffett Partnership Ltd. from 1957 to 1969. I did some math and it turned out that the partnership had a cumulative percentage gain of 51.3% in the first 24 months.
What? This can’t be right, I thought. I can’t beat Warren Buffett’s record. I haven’t even gone to business school. But, upon scrutinizing the partnership’s numbers, I saw that its highest gain in two consecutive years was 94.7%. Holy cow! I really did better than Warren Buffett.
Why was I better, though, since I did not know more about business and finance than he did and had much less experience?
In all life pursuits, there are two variables that make a difference in everything we do: Knowledge and Behavior. As per knowledge, I had read most of the investment classics Warren Buffett must have read, those by Benjamin Graham, Philip Fisher, and the rest, and knew how to read a balance sheet and an annual report. From this, I realized that knowledge was a constant, and he beat me there. Therefore, my fabulous gains were not based on my knowledge. They were based on my behavior.
What was my behavior? Simply, I sold a stock when I found a better one to buy. I did not care about the capital gains tax, or the holding period, or the earnings estimates, or what the company did or produced.
In hindsight, instrumental in my stellar performance were two pieces of writing that influenced my behavior: 1) Peter Lynch wrote in Beating the Street that he was very flexible when he managed the Magellan Fund, 2) In a newsletter written by Mark Skousen, Ph.D., he said that hedge fund managers posted huge gains because they were very nimble.
That was it. That’s what I did without knowing it. I stayed nimble and ended up making a handsome profit. Later, I read Warren Buffett’s biography and learned that he bought a stock and sat on it until the market priced it above its book value. I did the reverse. I bought a stock and couldn’t wait to sell it for a better one. Some of those stocks were selling at 3-5 times book value. The only thing they had in common was low P/E ratio.
Where am I now?
As I accumulated experience, I devised a strategy, which is a modified version of Benjamin Graham’s market strategy: Sell a stock if it gains 50%, or if it’s been held for 2 years, whichever comes first. But, when I think about it, this is one of the few strategies I use, depending on the situation.
I guess there’s no way out of it. If I were Austin Powers, I’d say to you, “Nimble, baby.”