That’s an interesting question I just received from one of my contacts. This is basically what I replied:
Most of my time is focused on what I have, specially on the most risky investments, to avoid losing money. It’s important to constantly monitor where money at risk is. I believe that focusing on what’s at risk is much more profitable than focusing on how much you can win. Focusing on my portfolio makes me specialize in my area of knowledge and on the companies already owned. It fortifies my circle of confidence. I believe that the main reason of losing money comes from not knowing well where you’re invested so doing that reduces that possibility. Knowing what I have has enabled me to accumulate by adding several times on previous investments. But don’t expect to know all about a company, it’s not possible, sometimes the price is so low that limited knowledge is more that enough to make sure you are right and you should sometimes act before the opportunity vanishes. Anyways, I expand my knowledge from that base and learn about competitors or adjacent industries. For example I invested in Applied Materials because I was already in some tech companies that used their machines. I invested in Intel for a similar reason. I bought Munich Re because I learned about insurance through Berkshire and follow closely what Buffett does. I bought Burlington Northern also “tipped” by Buffett… Most of the companies are connected in some way through previous knowledge.
I also read about the economy and industry in general. Different newspapers almost each day. I read the ppi/cpi reports and check which industries are increasing or decreasing prices etc… Keep an eye on sovereign debt, corporate bonds, volatility, currencies etc…
My advantage is that I only do this as a “job” and with personal money. I have my serious doubts I could perform as I did with limited time or with external pressures managing other people’s money. I just like to be on my own so I reject offers to manage others funds, except some from my mother in law and my son’s. After all I do this as a passion, for personal entertainment, like a complex game, wake up early and work until late, and want to keep it that way. If you enjoy what you do you’ll learn so fast that others will have a hard time catching up with you, choosing to do what you like puts you in a serious advantage. I liked it so much that I quit my past job to focus just on this. Even though I am making much less money for the time being, compared to my past office jobs, but I am sure that it will eventually change.
I follow what several investors do, if it makes sense I dig deeper. I like to buy when there is fear and generally not in fashionable or popular things. Mainly because prices are higher in popular areas. So I have more of a tendency to be attracted by situations where people run away from. I do not always buy then but I definitely get attracted and search there. There are always opportunities. Like in Spain now or also now with Dell and the expected death of the PC/notebook. Europe and Germany in 2010/2011. During the 2008/2009 crash in the USA I added heavily into BNI, I sold when Buffett bought the company. During the bad housing years of 2008-2010 I bought United States Gypsum, including several options. I already sold that. During the oil spill in 2010 I added Ensco, a sea driller. Specially in such cases I focus on good companies which are not necessarily in the center of the disaster but that are commonly perceived to be there.
I buy after studying quite some time, and only selectively, when the opportunity comes and when I’m very sure. Months or years pass sometimes. I read about companies I like but that are too expensive for my taste to buy (like Nestle, IBM, Apple etc…). Who knows if one day they get a cheaper I might get in. That happened with Cisco, I knew about it since long ago (1999) but only bough into it recently.
I focus much more on real cash flows and the long term than on quarterly results or accountancy inventions like earnings, p/e etc.. But I do like to use the obsession of Wall Street with quarterly earnings in order to buy when they think a quarter was bad. I like to listen/read conference calls and read 10Ks. Also about competitors. I make sure debt is small or very controlled.
I rarely buy more than 2 or 3 new companies/year, do not use leverage and generally buy in several times. I am better at averaging around or nearer to the bottom when I spread my buying than if I do it all at once. Regarding selling I usually hardly do it, I don’t generally sell when it reaches fair value because I focus on what I consider are good companies growing above the GDP so I keep them while the business does well. I only sell if the stock really gets priced quite above fair value, if the business and it’s earnings power deteriorates for the foreseeable long term or if I have a much better investment.
PD: Make sure you are not the kind of person who is affected by the fear/greed sentiments shown in the graph below. You should genuinely feel exactly the opposite when you invest so rotate the faces 180 degrees (I did that exercise with Gimp here, my favorite image manipulation program).