It snared my father when he first started investing, and nearly lead me to quit picking classic Benjamin Graham stocks altogether.
It’s a trap that a lot of people fall into and most never even realize the critical mistake they’re making.
It has a huge impact on your portfolio. It can lead to huge losses and wasted years when you should be busily compounding your money with classic Benjamin Graham stocks.
Net Net Hunter has been up and running for nearly a year and I’ve been lucky enough to talk to an ocean of interesting people about investing. Every so often, however, I’ll get a disturbing question from an investor who signed up to receive free net net stock ideas and is considering full membership.
Benjamin Graham gave investors a tremendous gift when he developed this strategy decades ago. NCAV stocks provide outstanding returns as a group. While the rest of the investing community is struggling to keep up the market indexes, investors who follow Benjamin Graham’s net net stock strategy typically beat the index, earning 20% or more per year on average over the long run.
Not all of these classic Benjamin Graham stocks are profitable, however, which is why I’ve developed a technique to screen out the less promising net net stocks.
It’s also why I get disappointed when people ask me how many stock ideas they’ll get each month if they sign up for full Net Net Hunter Membership.
Classic Benjamin Graham Investors Should Cultivate the Right Mindset
“If I sign up, how many stock ideas will I receive each month?”
This attitude is exactly the wrong attitude to take when it comes to investing. It doesn’t matter if you’re investing in growth stocks, low PE stocks, dividend stocks, or net net stocks — expecting great investment opportunities to come your way when you have the cash to invest is a great way to achieve marginal returns, or big losses.
Let me put this another way. Friedrich Nietzsche, a brilliant German philosopher from the 19th century, said that ideas come when they want to, not when you want them to. The exact same thing is true about good investment opportunities. It doesn’t matter how eager you are to invest in a great investment opportunity — that opportunity will come when it wants to, completely independent of you.
A lot of investors get this backwards. A lot of investors — even investors who invest in classic Benjamin Graham stocks — have a habit of thinking that a great investment opportunity should be there just because they want it to be there. Maybe these investors aren’t consciously aware of it but they have the expectation that they can invest in a great opportunity just because they want to invest in a great opportunity. This mindset can only lead to disaster.
When an investor really wants an investment opportunity to be available, he can start to play certain psychological tricks on himself. If the craving for a great investment is strong enough then he can start to mould reality to make that great investment happen. An investor who’s fallen into this trap, in other words, will start to gradually twist the facts, skew his own perception of the situation, and even erode his own standards for investment, just to make that investment opportunity available.
This mindset — that a great opportunity should be there when you want it to be there — gives you a tremendously strong incentive to fall into this psychological trap.
So, the answer to the question, “how many stock ideas will I receive each month?” is “as many great ideas as are available.”
Even Benjamin Graham Preached Selectivity and Patience
Warren Buffett, Benjamin Graham’s greatest student, used to tell investors to wait for the perfect pitch. I’m amazed that so many investors have not taken this advice to heart.
Warren Buffett compared investing to a game of baseball with no called strikes. In that type of game, you could just stand at bat and wait for the perfect pitch to come your way before you swing. You wouldn’t have to swing at the curve balls or fastballs. You could just stand there and wait for the most opportune pitches to come your way. In a game like this, you’d have a great batting average.
The investing metaphor should be obvious. As an investor, your funds sit in your brokerage account waiting to be invested. Every single day you have stock quotes presented to you which you can either ignore, or take advantage of. If you know the value of the stock in question — as Benjamin Graham insisted you do — then you can just wait for situations where a stock you’re interested in is priced well below its real world value before you invest. This is the essence of Benjamin Graham’s Mr. Market analogy.
If you wait to invest in the best opportunities then you’ll do much better as an investor.
If you’ve seen my own investment record then you’ll notice two things: the number of companies that I’ve invested in over the past few years are comparatively small, but my portfolio has done spectacularly well. Over the last 3+ years I’ve only held 18 separate positions, made up of 11 different classic Benjamin Graham stocks. My win percentage, the percentage of positions that have yielded positive returns, is a hair under 78% and the winners have lead to extraordinarily high returns. In fact, the average annualized return of each of my positions is just over 38% per year. That’s fantastic, and the only way I could have achieved that is if I waited for a great pitch each and every time I swung.
Your Mindset Could Easily Lead to Large Losses
Knowing when not to invest is just as important as knowing what to invest in. Doing nothing until a great opportunity presents itself is a necessary habit if you want a fantastic long term track record. Inactivity is an incredibly valuable core strategy.
Investing in a stock because you want it to be a good investment opportunity can be financially devastating. In How 16 Benjamin Graham Inspired Rules Can Earn You 38% Annually I showed how one single investment loss could wipe away an otherwise tremendously strong investment performance. If you invested evenly among 10 stocks, but one slips into bankruptcy, then even if each of your other picks returns 30% for the year you’d still only end up with a 7% return for your portfolio. The impact on your portfolio if you invested in that one stock would be a whopping 23%!
…and what if you didn’t nail down a 30% return on each of your other holdings or you suffer two major losses in your portfolio? You could end up losing a large chunk of your life savings.
Cash Is Like Oxygen — It Can Yield Explosive Returns When Brilliant Classic Benjamin Graham Stocks Surface
Patients is critically important and there’s nothing wrong with sitting in cash until you happen upon a good investment candidate.
Cash is opportunity, ammo. It can be easy to forget that after a 4 year long bull market. Cash helps protect you against market drops and it allows you to take advantage of opportunities when they arise. Cash allows you to double down on the great classic Benjamin Graham stocks that you’ve already bought when they become cheaper.
This is especially true during market peaks. It can be incredibly trying to sit back and invest only when you see great opportunities while growth investors seem to be getting rich by investing in popular stocks likeTesla Motors. When the eventual market collapse comes, however, and the entire stock market again begins making multiyear lows then cash becomes more valuable than life itself.
Cash acts like oxygen for a well tuned classic Benjamin Graham portfolio. Not only have you been able to keep most of the investment profits you were able to make before the crash, but you now have the freedom to choose from a wide range of classic Benjamin Graham stocks that have explosive potential. Not only are your paper losses smaller, but the amount of money you’ll inevitably make by buying during market turmoil will more than make up for a lack of investment options during the previous market peak.
Take Care of Your Downside and Your Upside Will Take Care of Itself
I can sum up nearly my entire classic Benjamin Graham investment philosophy with one short sentence: Take care of the downside and the upside will take care of itself.
Great investment opportunities don’t exist just because you want them to so you should really wait until you get thrown a great pitch. Doing so means being comfortable with inaction until opportunities presents themselves, while not doing so means achieving marginal returns and possibly losing a lot of money.
I’m going to stick to embracing inactivity, patients, and only investing in the best Benjamin Graham stocks when they come available. If you want the best possible investment returns then I advise you to do the same.