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Jason Zweig Interview: Teach Yourself to Become a Better Investor


Grenville
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A nice short interview with Jason Zweig that I thought ya'll would enjoy.

 

http://news.morningstar.com/articlenet/article.aspx?id=311658

 

Very nice idea:

 

"....The only effective way I know of doing it is to incorporate a kind of analysis that most advisors to my knowledge don't use, which is to track not just the hold portfolio but also the sold portfolio. You have to keep a continuous record of the performance of the investments you got rid of to see whether after you got rid of them they did worse. And I know very, very few advisors who actually do this, and in fact some of them are puzzled as to why that's necessary. And the simple answer is that you can't know whether you made a good decision to sell unless you look at the performance of what you sold after you sold it. Because it's quite possible it did better after you sold it than it did before you sold it. And it may have done better after you sold it than the thing you replaced it with, in which case you made a very foolish decision. And you can't evaluate whether you made a foolish decision unless you measure it...."

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This looks like a good idea, or is it?  It's even more

important to also track the intrinsic value of the

held and sold positions going forward.  If the general

performance of the board is like mine, this is probably

what you'll see:  Many positions are entered a little

too soon (some way to soon), measured by price performance.

Some positions are exited just right, but others are exited

too early as judged by Mr. Market.  Occasionally, you'll

have a long term hold that just keeps compounding because

Mr. Market ignores it.  This is where IV comes in.  If you don't

have a good handle on IV, you've made a mistake with

a company no matter what the price performance is, or you're just

fooling yourself that you're a value investor. IV is the moral compass to hold you on course

while the winds of fashion blow.  Then, after a few years

through the end of the latest fad or cycle, a better picture will

emerge revealing if your estimation of IV was a truer

heading than Mr. Markets'.

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And the simple answer is that you can't know whether you made a good decision to sell unless you look at the performance of what you sold after you sold it. Because it's quite possible it did better after you sold it than it did before you sold it. And it may have done better after you sold it than the thing you replaced it with, in which case you made a very foolish decision. And you can't evaluate whether you made a foolish decision unless you measure it...."

 

I completely disagree.  The problem with this kind of thinking is that there is the implication that your investment decisions are right or wrong based upon the market price of the asset.  For example, I buy at $5 because I think IV is $10 and the asset then rises to $10.  I sell out of my position and track the asset after my sale.  The asset then rises to $20.  Did I make a foolish decision? I don't think so.  As an investor, all I care about is (a) current market price and (b) intrinsic value.  Whether or not that asset will then be traded by overly optimistic parties at some later date is irrelevant and it certainly doesn't make my investing decisions foolish.

 

Biglari once stated that value investing is buying from pessimists and selling to optimists.  That implies that the asset you sold to the optimists might trade much higher at a later date.  And then I ask ... so what if it does?

 

I agree with what you are saying in regards to short term price. I still think there is value in the idea of tracking what you have sold for some time.

 

One's determination of intrinsic value is subjective. The goal should be to constantly improve the assessment of intrinsic value. Mr. Market provides a fairly strong data point in regards to intrinsic value. The caveat though is that in the short term that indication can be significantly off, but over time the market quote should eventually track intrinsic value. How much time elapses before the market weighs correctly is debatable.

 

The value is using the market quote over time to provide some feedback to the intrinsic value calculation.

 

An example:

Company A trades at $5 at year 1. Intrinsic value is assessed at $10

At year 2 the price reaches $10 and the intrinsic value is still assessed at $10 and the stock is sold.

At year 7 the price reaches $25.

 

Now what does this mean?

a. The market is overly optimistic

b. The assessment of intrinsic value missed something

c. A fundamental change occurred in the company after year 2

d. and so on....

 

In the event that (b) is true some % of the time, the process of tracking a sold position provides important feedback to the intrinsic value calculation. Investing is a marathon and not a sprint. Any bits of insight that can be picked up along the way is only beneficial.

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