Ten Lessons I've Learned from the Experts

on August 16, 2012
originally from Cabot Wealth Advisory

By Chloe Lutts,  

Editor of Dick Davis Investment Digest

Editor of Dick Davis Dividend Digest

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Buy Low, Listen to the Tape …

Don’t Put All Your Eggs In One Basket …

… And Other Investing Lessons

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As editor of the Dick Davis Investment Digest and Dividend Digest, I have privileged access to the advice and opinions of the hundreds of analysts, editors and market watchers who contribute to the Digests. It’s a position any investor would be envious of. 

Six months ago, I thought of a way to share some of that expertise with a broader audience, and started the Dick Davis Digests Contributor Interview Series. Since then, several of our gracious contributors have taken the time to talk to me about their investing education, their newsletters and their investing systems, and to share advice for the readers of Investment of the Week. 

Today, I’ve combed the first six months of interviews for the most relevant pieces of advice to share with Cabot Wealth Advisory readers. From diversification to discipline, they’re all lessons worth learning.

John Buckingham is the chief investment officer at Al Frank Asset Management and editor of The Prudent Speculator. Company founder Al Frank was well known for his successful value investing strategy, and Buckingham learned at his feet. He took the time to talk to me in March, and had some common-sense advice for aspiring value investors:

“Whether it is a box of cereal, a washing machine or a new car, most of us prefer to pay as little as possible, and we generally walk away if we think that the price is too rich. On the other hand, the stock market, as the old adage goes, is the only place where they hold a sale and few people show up.
 
“Though we find this puzzling, given that history shows that value stocks outperform growth stocks, we are grateful that investors often overly punish companies for short-term transgressions while they drive ‘hot’ stocks to unreasonably high levels. It is this dynamic that allows us to implement our strategy as we are able to make a reasonable assessment of fair value based on a variety of historical valuation ‘norms’ for each company, its sector and the overall market. When a stock is priced at a significant discount to that determination of fair value, we buy. When it approaches fair value or when we find another stock with much better reward to risk potential, we sell.”

Adrian Day, editor of Adrian Day’s Global Analyst, shared a similar piece of advice when I interviewed him in May. In brief, he said, “Pay attention to limits; a wonderful company at $10 is not the same as that wonderful company at $8.”

Buckingham also offered a few words of wisdom regarding portfolio construction, specifically, on selecting investments that work with your timeline:

“I think investors would do well to understand the time horizon for each component of their investment portfolio, as that will allow them to use the proper measuring stick. Money that is needed to pay the bills, send Junior to college in the fall or even provide a one-or-more-year emergency ‘cash’ cushion should be invested very conservatively, though yields on available instruments are microscopic today.
 
“Assets earmarked for retirement or with at least a three-to-five-year time horizon can be invested, in my view, in more volatile instruments including the stock market. Unfortunately, the 24/7 media coverage of the equity markets and smart-phone access to tick-by-tick portfolio valuations make it difficult to focus on the long term, which often leads to a much more conservative stance too early in life. Consider that depending on the ‘lens’ used, 2011 was either an extremely volatile market year (there were 7% daily moves up and down in August, for crying out loud), or one of the least volatile years (the S&P 500 was virtually flat for the full year).
 
“Remember that retirement funds may need to last 20 years or longer, so what happens in a day, week or even month in the stock market, should not cause one to deviate from a long-term investment plan.”

Several other interviewees also mentioned the difficulty—and importance—of avoiding day-to-day chatter about every stock market twitch. Nate Pile, editor of Nate’s Notes, summed up this lesson nicely:

“In a nutshell, investing is a marathon, not a sprint. In this day and age of ‘constant connectivity’ (and incredibly low commissions for online trading), it can be very tempting to try to trade every zig and zag that a stock makes. However, experience has taught me that it is far easier (and quite a bit less stressful), to focus instead on finding companies with great long-term potential, establishing core positions in them, and then patiently adding to (or subtracting from) those positions as time goes by based on how well the company is executing on its business plan.”

Pile also talked to me about the lessons he learned in the early years of publishing his newsletter, Nate’s Notes. The following piece of advice stuck out to me because it’s something we say a lot at Cabot—and also something many investors still have trouble with. Here’s Pile’s explanation of how he learned this lesson:

“Another change that I made during the first few years of the newsletter that is still with me today is a greater willingness to ‘listen to the tape.’  

“Like many individuals, I prided myself on my ‘strong contrarian streak,’ and given that Nate’s Notes has always taken a long-term view of investing, it seemed logical to me in the early days that if I loved a stock at $20 and it then slipped to $15, I ought to like it a whole lot more (and, in fact, this line of reasoning still seems logical to me today!).  

“However, after ‘riding stocks down’ far more often than I care to remember—even after noting to myself ‘oh boy, here we go again’ when experience was telling me an extended slide was about to get underway—it finally dawned on me that rather than buy more shares every time a stock dipped, I would be better off letting it slide for as long as the market would allow it to slide… and to not start buying again until the trend had finally run out of steam and reversed itself.  

“By making this change in my approach to investing, not only did the newsletter’s returns improve even further (because we stopped losing as much during downturns in the market), but my confidence in myself also started to grow to the point that I knew publishing the newsletter was going to be a sustainable business after all.”

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The first person I interviewed for the series was Vivian Lewis, whose newsletter, Global Investing, is currently ranked by The Hulbert Financial Digest as the fifth-best performing over the past decade. She had some simple and sound advice for income-focused investors:

“The most important thing to do now is to be sure the yields you buy are secure and real. Very high pay-out levels usually mean there is something amiss with the stock paying them. Just looking at a chart won’t tell you what is wrong.”

In June, I interviewed fund expert Ron Rowland, whose newsletter, All Star Investor, has been named to the Hulbert Financial Digest's investing newsletter Honor Roll for the past two years. I asked him what one big mistake he sees investors make too often, and he said:

“One of the biggest mistakes that I think investors tend to make is locking in on a certain time frame, believing the conditions that existed then will last forever. Three years tends to be such a period for many investors.
 
“In the late 1990s, following about three years of strong performance by technology and large cap growth stocks, many investors were convinced that tech and growth would be all you needed in the future. More recently, MLPs have had a great three-year run, and I've met investors who now want to put 100% of their holdings into MLPs.”
 
In April, I talked to Neil Macneale, editor of 2 for 1 Stock Split Newsletter. He had two important pieces of advice for investors, both touching on the importance of discipline to investing your own money successfully:

“It probably sounds like preaching but, in my humble opinion, there is a large percentage of investors who need to think and behave less like gamblers and more like investors in the true sense of the word. When you're dealing with retirement savings or your child's college fund, you have to get it right, and buying stocks on a co-worker's hot tip or selling stocks because of a panicky news headline is not getting it right; not even close.”

He added:

“Many, if not most, newsletter readers are looking for a magic bullet, a path to instant riches, and they are constantly trying new letters after being disappointed their current guru hasn’t delivered. I say to these folks, ‘Pick a letter with a very long track record you can live with, and then commit to a program you understand and will stay with through both ups and downs.’ If an investor finds this just too hard to accomplish, then they should buy a good broad market index fund and forget about individual stocks.”

Our last piece of advice today is a classic. It comes from Tom Bishop, editor of BI Research, who I talked to earlier this month. He advised:

“Never put all your eggs in one basket—or, should I say, too few baskets. Stay diversified. Having been around the block for 40 years, I have seen it all. Anything can jump out of the woodwork and go wrong—and often enough does, especially with small caps. And investors will overreact to the latest news, good or bad in either direction.”

My interviews with the Digest contributors are ongoing, so if you’re interested in more good advice (and stock recommendations) from a wide variety of experts, consider signing up for my free e-letter, Investment of the Week, by clicking here.

Wishing you success in your investing and beyond,

Chloe Lutts
Editor of Dick Davis Dividend Digest

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