This article will deal with trusting the “experts”. In October 2010 the fool.com announced the formation of rising stars. The idea was to select the motley fool analysts and give them $1000 every month. These analysts will research stocks and manage the portfolios. They will actually write articles (a pitch so to say) for the stock and then tell us how many stocks they bought and at what price.
I thought this to be a sure-fire way to do less research on my own and trust the analysts, because they were managing the portfolio like their own money. So, I read the picks, put them on my watch list and look for drops in the price. By this time though I had already made an interactive brokers account (IBKR) and was ready to buy in small portions.
This way I bought the following stocks. I give more or less a complete list to show the problems with the idea of picking stocks on other people’s recommendations.
- Ampco-Pittsburgh (AP), the rising star Alex Pape bought it at $25.45 and I bought it at a 15% margin of safety at $22.
- PowerOne (PWER), the rising star Jim Mueller bought it twice at $8.83, and then $7.48 and $7.51. I bought it $7.47 and $5.34 at a significant margin of safety.
- TriQuint (TQNT), Eric Bleeker bought it at $13.49 and I bought it at $10.06.
- Similarly, I bought Veoila (VE) at $26.73, Enernoc (ENOC) at $17.66, Thompson Creek (TC) at $9, Elbit Systems (ESLT), Petrobras (PBR), Rock-Tenn (RKT), Waste Management (WM), Ford (F), Best Buy (BBY), Bank of America (BAC) and Seaspan (SSW).
Many of the above stocks are down 50% at the moment (PWER, ENOC, TQNT, BAC). If I had done my own research I would have found the following
- A value investor on his own cannot follow and keep track of so many stocks. He will either have to do superficial analysis or not be up-to-date with the quarterly or annual reports of the companies. He will be a lucky investor indeed if he chose so many stocks which are actually buy and hold forever. I realized that keeping track of so many stocks is impossible for me. And so I sold TC, ESLT, RKT, WM, F and SSW. I did not make much loss on those because I was able to average down and get out in the recent market bounce.
- To not sell during the panic and in fact buying more on dips requires that you know the company quite well. I am not comfortable with ENOC, PWER and TQNT to buy more even though they are down substantially. I do not see them as a bad investment per say but they are in a relatively new industry with a lot of competition, a recipe for disaster. If someone suggested any of these three stocks to me now, I will not have invested in those.
- Trusting the experts has many problems. To begin with you do not know if the experts are really experts and even if they are, have they used their expertise or simply are repeating someone else’s pick. Many analysts do not do their own due diligence and “take” ideas from another analysts.
If you buy on an analysts pick you must look for his advice on when to sell. The analysts might not be following the stock anymore or if he is he may give the sell advice too late. I mean, it is not his money which is on the line. I am not saying that you should stop listening to the experts/analysts. You can still take their ideas and see if the pick actually makes sense. But do your own research. This is of utmost importance. Do not buy a stock ever which you do not understand.
I cannot thank gurufocus enough for the opportunity to write about my ideas/picks and have so many intelligent investors comment on it. It has been quite an experience and writing has helped turn my ideas into value picks.
About the author:I started investing in December 2009
and my first stock CreditSuisse (CS) tanked to almost half its
value. This nudged me to start learning about investing from the ground
up. I am a long term value investor and am planning to generate sustainable amount of money from investment income by the time I am 40 years old i.e., 2025.