Read this before you buy your next stock

By Guest |  26-09-18 | 
 
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About the Author
Morningstar invites thought leaders from the investment community to share their insights. Views expressed are personal and should not be construed as investment advice.

Vitaliy Katsenelson, CEO at Investment Management Associates writes on why investors must do their own research, even if they read someone else's detailed analysis. 

I want to address an issue that has bothered me for a while now. When I write about stocks my musings are not recommendations but just thoughts on stocks at this point in time. I am usually very clear whether we own a company I am writing about. (I don’t usually write about small companies as I don’t want to create even an appearance of trying to influence a stock price.)

My articles are static thoughts at a fixed point in time. However, as you well know, investing is not a static endeavor. New information comes in all the time. Sometimes it causes us to adjust the assumptions in our models and may cause us to change our views on companies. As Keynes may or may not have said, “When the facts change, I change my mind.” We may buy more of a company, sell it, or do nothing. Our thinking is rarely driven by the stock price change alone, unless the price has reached our sell price.

If you buy a stock based solely on my write-up, without doing your own research, then you are committing yourself to a static analysis. I may have already changed my mind. My writing is about teaching you how to fish and is never about providing the fish. If you like the sound of a company I write about, do your own research to firm up your own conclusions. Stress test my assumptions and form your own assumptions.

By the way, this is exactly what I do all the time. I talk to hundreds of like-minded investors a year. We share ideas. If I like an idea, we start doing our own research. We read the company’s filings, talk to management, build our models… the usual stuff. And then we arrive at our conclusion … and may even buy the stock.

Value investors are the buyers of hate.

We often ride the wave of negative momentum. We try to buy $1 for less, let’s say 50 cents. The reason the $1 is selling for less is because that road in the short run may prove to be very rocky and unpleasant. Trust me on this; my rapidly balding head is a testament to it.

My long-term readers will remember my Electronic Arts adventure. We started buying at around $16, and then it seemed that the stock declined every day for eight months. It seemed that every bit of news that came out about the gaming industry and EA was negative. Until it was not. (Here is my EA presentation, and here is the article). If you had bought EA blindly based on my article, the next eight months would have been very painful, because to you there was no difference between the stock’s quoted price and its intrinsic value (what the company was worth). I think the stock bottomed 30% or 40% lower before it started its ascent.

Please, do your own research.

Focus on what businesses are worth, not how the market prices them.

Stocks are priced every second of the trading day. Thousands of times a day someone tells you, this company is worth this much. Actually, this is not what they tell you; this is what you hear. What they tell you is “I would buy or sell this company for this much at this moment.” There are a million reasons why someone might want to buy or sell a stock on any given day. A lot of them have nothing to do with a company’s value. So yes, there is a difference between value and price. You only know the difference if you’ve spent the time to value the company.

Don’t let stock-market volatility go to your head. The value of the companies in your portfolio doesn’t change by a positive or negative 5% three times a day.

Get the value right and the price will follow.

The above information has been taken from the articles  Read this before you buy your next stock and  How a stock market turns investors into gamblers , both authored by Vitaliy Katsenelson. 

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