- The persons you are talking with, might not understand your strategy or have a different strategy. For example, when I purchased shares of IBM (IBM) after it fell in October, a reader posted an analysis of the company from another source. The other source mentioned that the stock should not be acquired. I replied to the reader that I do not care about this other analysis, because I was following my strategy. One should not never others opinions influence their decisions, particularly if they have done the work needed to have their initial conviction in the first place.
If you have done the work, someone who doesn’t agree with you should not have an impact on your decision. In fact, some of my best bets have been at a time when the majority of investors disagreed with me. Actually, since 2009, it seemed that almost everyone disagreed with me on buying stocks.
However, if I found out new and material information about my investment, I should evaluate whether it impacts my analysis or not. But if you let random people’s opinions influence your decisions, then you are doing yourself a disservice.
- They might be bad investors. The thing is that I do not take others opinions into consideration, because I never know if the person has done their homework, what their level of experience is, and whether they are using facts, or whether they are simply biased against something for whatever reason.
However, I do review these opinions especially if they come from someone who I regard as knowledgeable. Those are not only the Warren Buffett, Charlie Munger, and Peter Lynch of the world however. It could be an ordinary investor, who can also provide some you with a nice dose of common sense when you most need it. These investors are rare, but once you find them, hold on to them for their opinion. If I learn a fact that I have not come across during my analysis of a stock, I would seriously consider it, and determine how it impacts the probabilistic outcome of my investment, if it came from a reputable source. I do not subscribe to conspiracy theories on investment matters however. For anyone else who is untested, you would do well for yourself if you ignore them, after applying your BS filter.
The truth however is that sometimes, investors make mistakes. I make my fair share of mistakes on a monthly basis. Input from other smart investors can catch any blind spots in my research. However, if I had done a good job in analyzing securities, any “opinions” I receive should not bring anything new to the table.
If they do bring something new and material, then I should definitely evaluate them. For example, when I was first starting out as a dividend investor in 2007-2008, I analyzed Realty Income (O) and determined that it was a terrible investment. This was because I was doing the mistake of looking at earnings per share, and hadn’t even heard about Funds From Operations (FFO). After I learned about my mistake, I did some work researching this new theory on valuing REITs and determining for myself whether it made sense. I realized I was wrong, and in a subsequent analysis decided it was an attractive investment. As you gain experience in investing, you would notice certain recurring opinion themes you need to ignore at all times, such as conspiracy theories or constant doom and gloom. However, you should also be able to distinguish opinion that are well grounded in facts, which require further investigation on your part.
Another example includes my attitude towards taxation and investing. For as long as possible, my attitude has been that my goal is to earn money first, and only then worry about taxes. However, after reviewing my tax situation for several years I realized I was wrong to ignore taxation issues. If I have to sell a stock, I sell it regardless if it would produce long or short-term gain, since I don’t want to turn gains into losses. However, I am trying to max out 401 (k) and IRA accounts today, in order to gain the most in tax benefits. My goal is to then convert those amounts slowly into a Roth IRA after I retire. I was inspired by blogger J Money on gaining the most in tax deductions today. However, I think I came up with the idea to perform a Roth IRA rollover and pay low taxes on it myself. I think.
Another example includes my recent monitoring of Procter & Gamble (PG). I have been accumulating the stock of this dividend king for several years. However, while it has been able to increase dividends every year for over 5 decades, it has been unable to increase earnings per share since earning $4.26/share in 2009. This means that dividend growth has been running on fumes over the past four years, while I have been patiently hoping for earnings growth to materialize. This means that I should not be buying more shares in this company for the time being. I would still be holding on to my shares, as the risk of dividend cut looks remote.
At this point it looks as if future dividend growth would likely exceed inflation only slightly. As a long-term investor, you sometimes have to be able to change your mind, when presented with facts that might run contrary to your opinions too. I think that Procter & Gamble is a core holding for any dividend investor, but if the company cannot grow earnings per share over the next decade, I would not add any money there and would use the dividend checks elsewhere. If they cut the dividend, I would close my position one minute after the announcement.
This is why investing is more of an art than science – you can probably ignore the opinions of the people that haven’t done any homework, but you should be aware of differing opinions that bring a material fact you haven’t previously considered. By practicing the art of stock picking for a long time, you would likely be able to distinguish which one deserves your attention, and which group doesn’t.
Full Disclosure: Long PG, O, IBM