Saturday, July 08, 2006

>Long Term Vs Hunter Investing

“There are basically three ways to do unusually well in the stock market:

1) Buy stocks that are cheap and sell them when they are reasonably priced: value investing.

2) Buy into companies that will grow and grow and grow, and stay along for the ride.

3) Discover a whole new investment area.

Terribly cheap stocks are usually under a cloud at the time, or perhaps overlooked. The market exaggerates bad news, so if the real prospects of a company decline by a quarter because of an adverse development, the price of the share may fall by half. Thus, in value investing the attractive stock is often the one that's smashed down by bad news. False bad news is best, but true bad news is fine. The same works in reverse for good news, whence my maxim, "Nothing exceeds like success”

The easy buy-sell rhythm to catch in playing the value game is the basic four-year stock market cycle-which, to be sure, often lasts more or less than four years. At the bottom almost every­thing is ridiculously cheap, and at the top almost everything is extravagantly overpriced. Thus, the great value investors studied in my previous book, The Money Masters, often have a four-year buy-sell cycle. (The top growth investors in that book often hold their outstanding stocks as long as they stay outstanding­- sometimes for decades.) I did not know what to expect when I started in on this volume, but it turns out that for some of today's masters the cycle is much shorter: as little as a few months, or whatever time it takes for a purchase to attain a previously calculated price level. This is a hard discipline for an ordinary investor to follow, and in any event will probably run up trans­ action costs.

The growth investment techniques described in the earlier volume remain valid for the masters in this one, but some of the value investment techniques are different. In general, short-term investing is a sucker's game, enriching only the brokers; however, the greatest of today's value investors are able to carry it off.

Relentless Pursuit

Short Kwi was famous in his own right, famous as a hunter . . . it was his technique of hunting to be relentless in his pursuit; therefore, if he shot an animal [with a small, weakly poisoned Bushman arrow] and suspected others to be in the vicinity he would let the wounded animal run where it would while he hunted on and shot another, and another, and when all were as good as dead he would rest, then return to pick up the trail of the one that he felt would die the soonest. He almost never lost an animal, for his eyes were sharp and he could follow a cold trail over hard ground and even over stones; he could tell from fallen leaves whether the wind or passing feet had disarranged them.

A technique we find in this book is what might be called relentless pursuit: constantly scanning the herd for new stocks to pick off for limited moves, rather than as long-term commit­ments. Here, for example, are some contrasts between the tradi­tional long-term investment style, as exemplified by Warren Buffett, Philip Fisher, T. Rowe Price or Ralph Wanger, and that of one of today's slalom artists, such as George Soros, Michael Steinhardt, Peter Lynch, or, sometimes, John Neff:




Stay with long-term trends

Catch changes early


Buy for the long term

Constant turnover


Ride through minor setbacks

Sell on possible adverse developments


If the price becomes excessive, wait for the earnings to catch up

Sell if the stock gets ahead of itself


Give preference to existing holdings that you are familiar with

Comparison-shop ruthlessly


Put your eggs in one basket

Diversify extensively


Develop a congenial investment philosophy and stick to it

Have no prejudices


Know everything about a few big things

Know a lot about many things


Develop helpful rules and formulas

Avoid formulas


Understand each company intimately

Buy batches of companies that together represent a thesis


Know management intimately

Don’t worry much about management


Trust to the magic of quiet long-term compounding

Force the pace


Don’t worry too much about the exact price you pay or receive: over a five or ten-year holding period it should be unimportant.

Be very conscious of price in both buying and selling: multiplied by many transactions it is critical

In the relentless-pursuit technique, one tries to enter at a reversal point, setting a precise target for the later sale. This method can only be practiced successfully by authentic masters at the height of their powers, like Short Kwi. It also involves high turnover, meaning heavy transaction costs, unless the dealing side of the operation is conducted with great skill. So one should follow the further discipline of always buying on weakness and selling into strength. That requires either a price-sensitive broker or putting in carefully set limit orders.

George Plimpton, in one of his "professional amateur" exper­iments, played quarterback with a pro football team. He had a simple assignment: Snatch the ball from the center, then spin around and hand it off to the back sprinting across behind him. Over the years the team had so honed the rapidity and accuracy of its plays that Plimpton simply could not perform this move before the back had raced past beyond reach. In competition with first-class opponents, one must function at the limits of the possible. In investing, that is what Soros, Steinhardt, Lynch, and Neff are doing. The nonprofessional can scarcely aspire to that degree of skill, and supposing wrongly that he has it may be expensive.”

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