My investment philosophy is actually pretty simple; I’m a classic value investor in the manner outlined by the masters Ben Graham and Warren Buffett.
Like them, I invest in companies rather than stocks and try to ignore what the market is doing. On most days I could not tell you what the Dow or the S&P is doing, and I don’t want to know. I have other and more interesting things to do with my time, such as work for a living.
Instead of looking at the trading, I look at the company itself and ask three all-important questions:
- “How does it make money?”
- “Will it continue to make money?”
- “Can it make more money in the future?”
I like stocks because these questions are pretty easy to answer when it comes to publicly traded companies. You can look at things such as TTM revenue, free cash flow, and net income and quickly determine if a company is actually making money. More importantly, you can see if a company has a history of making money and the potential to make more money in the future.
One reason why I do not like instruments such as bonds and mutual funds is that it is pretty hard to find out how much they actually make. They also bore me, while publicly traded companies and the economic environment surrounding them fascinate me, so I concentrate on what I enjoy.
I usually concentrate on companies in businesses I know, such as energy, technology, e-commerce, and retail. Then I buy really good companies that are trading at low prices.
My investment strategy is buy and hold. Trading, I believe, is a great way to lose money fast, so I buy and hold. My thinking is if a stock is not worth holding for a long time, it has no business in my portfolio. I also trust my instincts, which are usually pretty good. If my gut tells to sell, I usually sell, but it usually does not.
My Take on Behavioral Investing
In addition to being a value player, I’m something of a behavioral investor since I believe that human irrationality is a major factor in the markets. I naturally believe in Ben Graham’s old statement that Mr. Market is insane.
One thing I do not believe in is the efficient market theory. To be efficient, every player in the market would have to be totally rational. The stock market probably is efficient on the planet Vulcan, where everybody is logical; here on Earth, it is not.
I also believe that human emotion plays a big role in the market. Fear, greed, hope, euphoria, etc., drive stock buying. They even affect institutional investors profoundly.
This, of course, is why some companies like Tesla (NASDAQ: TSLA) and Amazon.com (NASDAQ: AMZN) can be profoundly overvalued—people like them—and some, like Kroger (NYSE: KR), are deeply undervalued.
Looking at behavior can also tell me why certain companies are doing well or badly. Costco Wholesale (NASDAQ: COST) does well because it satisfies the emotions of buyers. Soccer moms do not have to feel guilty about spending a lot of money because they get good prices, high quality, and a lot of value at Costco.
Dollar stores like Family Dollar (NYSE: FDO) are not doing so well because they remind shoppers how broke they are. Nobody likes to be reminded that they are poor. Costco makes people think they’re doing well because they can buy a lot of stuff, including many premium brands that make penny pinchers feel like they’re still middle class. A person pushing a cart full of cheap junk out of Family Dollar feels poor. A person pushing a cart full of premium stuff out of Costco feels smart and frugal.
There are many such behavioral patterns out there; if you can spot one, you can invest accordingly. Warren Buffett does something like this when he buys into things like Coca Cola and GEICO.
One particular behavior pattern we can pay attention to today is the number of people that watch streaming video instead of traditional pay or cable television. That’s going to have a profound impact upon the media industry and advertising dependent consumer companies like Kroger.
Another is the growing popularity of online shopping, particularly that driven by “free delivery,” which makes people feel that they are getting something for nothing when they are not. The illusion of free delivery is driving the growth of companies as diverse as Amazon.com (NASDAQ: AMZN) and Wal-Mart Stores Inc.’s (NYSE: WMT) Walmart.com. People are more likely to buy online when they think the store is covering the delivery costs.
That’s a little insight on how I pick stocks. I generally try to identify some trend in the larger economy, such as changes in consumer behavior, and try to find good companies in a position to take advantage of it.