Last edited on Thu Feb 15th, 2007 01:06 by Jeffrey

Look for the right stock, not the right market



A policeman is walking his beat on a dark, foggy night. He comes to a corner with a single street lamp tat throws off just enough light tho provide a small beacon in the surrounding shadows. At the base of the lamp is a man on his hands and knees searching about. He's evidently drunk. The policeman approaches the poor fool and asks what's he doing. The man continues looking at the pavement and responds, 'I'm looking for my keys!'. So the policman, a kind sort, begins instinctively to help in the search. After several minutes and no sign of the keys finally the poileman asks, 'Where exactly do you believe you dropped the keys?'. The drunk replies, 'A couple of blocks down the street, near my favourite pub.''A couple of blocks away!' the polieman shouts in amazement, 'Then why are you looking for them here?' The drunk instantly replies, 'What are you kidding, the light's so much better here!'

An old story but so many equity investors search for stocks the same way the poor drunk looks for his keys, devoid of logic, but where the light is best. The light always shine most brightly on popular businesses in exciting market sectors/ Don't be scared of the fog or the dark. Don't associate winning investments with popular investments any more than Sun Tzu would associate the motion of the rock instead of the mountain. Popular industries don't create shareholder wealth, well-managed businesses with superior economics do - especially when purchased at bargain prices.

Many investors spend too much time analyzing the past instead of simply learning general market tendencies of the past, especially as it applies to investing psychology. Painstaking analysis of past market trends will not make you a better investor because the future never precisely mirrors the past.

There was once a Mayan Indian tribe in South America who passed through the generations a myth about the futility of using past occurrences to project future actions. The legend spoke of the universe being destroyed four times and everytime the Mayans learned a sad lesson and vowed to be better prepared the next time - but always for the previous catastrophe. First there was a flood, and the survivors remembered it and rebuilt the city on higher ground in the woods instead of along the river shore. Their efforts were wasted because the next village was destroyed by fire.  The survivors remembered the flood and the fire and rebuilt the city out of stone, which was a waste of time because the next natural disaster was an earthquake that crumbled the stone buildings. Wherever the Mayans chose to rebuild, whatever materials they chose for their homes, they were always looking through the rear view mirror and suceptible to a changing future. The solution to such a problem is to simultaneously learn from the past and consider an uncertain future.

For the stockpicker, even if the future could be seen with clarity from the perspective of the economic conditins, interest rates and market performance - you are still left to select individual investments, which is just as challenging as if you had no special powers of foresight. Therefore your future assessment is best limited to specific projections of individual businesses.

As soon as you move your attention from business fundamentals (the mountain) to price movement patterns or other illogical superstitions (the rocks), investing will become frustrating. You will feel like Chinese philosopher Yung-Chia as he struggled to describe perfection: "It is only when you hunt for it that you lose it; you cannot hold it. But equally, you cannot get rid of it, and while you can do neitherm it goes on its own way." Intelligent investments are all around you, yet they are so difficult to identify. In the words of Zen master Daito, "We are facing each other all along the way, yet we have never met."

Last edited on Thu Feb 15th, 2007 07:59 by Jeffrey