Let's Get Real

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Let's Get Real
(Part I)
by WealthEffect Staff


Always let reality get in the way of a good theory
  How to handle your stocks going down  
  How to handle everyone else's stocks going up  

The real world has a nasty habit of messing up perfectly good theories. When the facts don't fit the formula, the easiest response is to ignore the facts.

The investments you buy don't particularly care how deserving you are, but they will respond to common sense. The stock market is the longest-term investment you can find — any strategy designed for short-term gains can't rely on the inevitability of good sense. Momentum trading, chart reading, buying a stock in the hope of a six-month profit — these approaches might work or they might not. Regardless, your future wealth now becomes a speculation.

The approach suggested in WealthEffect Strategy is based on logic backed up by history. It is also an approach heavily influenced by two of the best investors out there: Warren Buffett and Charles Munger.


This strategy will almost certainly treat you well if your timeframe is decades, not years and certainly not months. In the short run, anything can happen (and at some point, will). At any given time, any stock will sell for whatever people are willing to pay, which might be a lot lower than you paid for it.

When people are afraid, the stocks of all companies, even great companies, will fall. To make matters worse, there's usually some bad news to feed the fear. It's when the news is bad and the outlook uncertain, however, that you will be thankful to own great companies because you can afford to give them the benefit of the doubt. You can step up and add to your holdings with a confidence that you couldn't have (and shouldn't have) with the average company. You can take advantage of people's fears without the fear of throwing good money after bad.


Not only will stocks you own go down at times, but many that you didn't buy will go up. This is a certainty. For one thing, there are 9000 stocks out there and those which are leading the pack will get the most attention. As an investor, you must accept this fact and stay focused on your competitive advantage. This is easy advice for some, difficult for others, but it's the only advice that makes sense.
  Let's Get Real
(Part II)

Internet beverages with Peter Lynch
  Baseball with Warren Buffett  
  One-on-One with Bill Gates

(Please note that this article was written and posted when Internet stocks were in favor — the underlying arguments, however, are still valid.)


No sector of the stock market has produced more profits and envy in recent months than the Internet shares. These stocks would routinely rise more in a day than investors would hope for in a year. Why, then, should you or anyone else worry about investing when there were (and are?) such easy profits to be made?

The answer, of course, is that you have no way of knowing if the "easy" profits of the past will continue. It was only a few years ago that the "Information Superhighway" was the sure thing, and the Internet was a word unknown outside of academic and military circles. Peter Lynch tried to put the current mania in its place when he said, "I thought Yahoo was a chocolate drink." Warren Buffett, for his part, suggested that business students be asked to value an Internet company — anyone who comes up with an answer, fails.


In describing the process of investing, Buffett also offers a baseball analogy. Trying to hit every pitch out of the park is not the goal. The trick here is to realize that you only have to swing at the pitches you really like because, in this game, you can't be called out on strikes.

Rather than whining about the many great pitches he didn't swing at for whatever reasons, Buffett waits patiently for the right opportunities. In doing so, he chose not to swing at a pitch that might surprise you: Microsoft.


Microsoft is a company which Buffett probably understood better than most people who bought its stock (and made huge profits). Aside from his extraordinary knowledge of business, Buffett also had the advantage of his close friendship with Microsoft's chief exec, Bill Gates.

Gates spent five hours explaining the opportunities and challenges facing his company at which point Buffett decided against taking a meaningful position — not because he didn't think Microsoft had a competitive advantage, but because that advantage might not be sustainable. Technology changes too fast to give any such company the long-term predictability that Buffett demands.

Nevertheless, in sticking to his own "circle of competence", Warren Buffett has found enough perfect pitches to build a personal fortune of some $40 billion.

Suggestion: Go to Passive vs. Active Investing