Here’s an excerpt:
1. ‘I love this company.’
This is the statement that gets investors into more trouble than any other, and here’s why: You are not buying a company — you’re buying stock in a company. There’s a universe of difference between the two.
Warren Buffett of Berkshire Hathaway (BRK.A) buys companies; Cisco Systems (CSCO) CEO John Chambers buys companies. When Jack Welch was running General Electric (GE), he bought companies. Mere mortals such as you and I — we only buy stock.
It is arrogance to imagine you are purchasing anything more than a one hundred millionth of an ownership stake (or less) in these firms. The action of that equity is much more important to you as an investor than your personal affections for the entire company.
Microsoft (MSFT) is a good example of this — in 2002, you could have paid as much as $35 (postsplit) or as little as $20 per share. It’s still the same company, but at the recent price of $26, one buyer is up 30% while the other buyer is down more than 25%. Same company, different entry prices for purchasing the stock.
That’s why pricing and timing are so important.
Loving a company will not make up for a bad buy. Unlike VCs and corporate chieftains, we don’t get to buy business models.
Part I discusses the first 5, which include:
1. ‘I love this company’
2. ‘I am a long-term investor.’
3. ‘I just heard on CNBC (or CNN or Bloomberg) that…’
4. ‘I don’t want to pay capital gains taxes.’
5. ‘I’m waiting for the stock to come back to break-even.’
I’ll cover the next 5 next week. They include:
6. ‘This Stock looks cheap down here . . .’
7. ‘This fund did great last year.’
8. ‘I’m a Bull" (or "I’m a Bear")’
9. ‘I don’t want to take a loss.’
10. ‘I’ve got a great stock tip . . . ‘
Prior columns can be found here.