Warren Buffett and Shaq have more in common than you think.
- Jan 06, 2006
- admin
- Investing
WARREN BUFFETT AND SHAQ HAVE A LOT MORE IN COMMON THAN YOU THINK.
No, I’m not talking about the fact that everybody who sees them
standing next to each other thinks that their twins.
Nor am I’m not talking about the fact that everybody who meets them
wants their autograph.
What I happen to be talking about is that each one has made a career,
and a fortune, out of taking “high percentage” shots.
In Shaq’s case, his high percentage shots come from underneath the
basket, where he can sink 70 percent of his attempts (versus 30 percent
for outside shooters).
In Buffett’s case, his high percentage shots come from buying stocks
so cheap that he’s esentially “standing under the basket” all day.
This point was reinforced to me recently when I was sent the following
question from one of our prospective subscribers:
QUESTION:
Why do you only recommend stocks when their shares have dropped? Isn’t
it more dangerous to buy a stock when it’s dropping than when
it’s rising?
ANSWER:
Thanks for your question Jonathan.
I understand how counter-intuitive it can be to try to buy shares
of a company when a stock is actually dropping.
In fact, it seems that almost every investor, whether professional
or not, starts investing by using technical analysis.
Iím no different: I spent the first two years of my career trying to
predict the direction of stock prices by reading charts.
Itís clear now in hindsight to see why I, as most others people
begin start that way: learning technical analysis is easy.
In fact, thatís why most people get into it. I canít tell you how many
new investors Iíve met in my career who are fascinated by the visual
appeal of a graph with squiggly lines and arrows.
And when you see how much you could have made had you bought at
one of the past ìbuy pointsî on the chart, than it almost seems
foolproof.
Who in their right mind wouldnít want to make what looks like easy
money by reading something as simple as a chart?
But lets look at the cold hard facts.
Investing is about making money. And the way investors ìkeep scoreî
is determined by how much money they make investing. Thus it was
disturbing when, two years into it my career, I realized that there
isnít wasnít one technical stock analyst on the Forbes 400 list.
Sure there are macro traders, such as George Soros and Steven
Cohen.
But there isn’t one investor who made the list who uses technical
analysis to trade stocks.
I know itís hard to believe, but itís true: even William OíNeil,
owner of Investors Business Daily and the biggest proponent of the
craft, is nowhere to be found. Neither are were any of his most
famous ìstudentsî that he mentions in his book.
Perhaps even more disturbing (when you really think about it),
is that technical analysts advocate the use of pricing and volume
to determine whether you should even buy a stock in the
first place.
If a stock breaks out to a higher price on heavy volume, that
typcially means that you should purchase it.
If a stock drops in price that means you should sell it.
I think that’s silly. Let me explain why:
When you purchase a stock you’re are buying shares of an actual
business, not a floating piece of paper. And technical analysts
believe it is better to buy a piece of a business at a higher price
than it is at a lower price!
Imagine you took that approach to buying a new house? Or a car?
Or a watch?
Think about it for a moment.
Would you run out a buy a new home just because its price was
50% higher today than it was yesterday?
Would you avoid your dream home just because its price was
50% lower today than it was yesterday?
(No wonder theyíre not on the Forbes 400 list: the art of financial
suicide doesnít pay over the long-term.)
Nope, when I wanted to learn how to invest I started by studying
the most successful investor in history – Warren Buffett.
And then I went back in time to the people that HE learned from.
Ben Graham. Phillip Fisher. David Dodd. J.M. Keynes. C. Kindleberger.
Michael Porter, and others.
By the time I was finished I had read books on valuation and
investment theory dating back to the 1500’s.
What I learn astounded me.
I learned that if done properly, investing in stocks was actually very
simple if you followed 5 RULES.
And it was these 5 rules that each of the wealthiest investors on the
Forbes 400 list seemed to follow consistently:
RULE 1. ALWAYS PROTECT YOUR MONEY FIRST.
RULE 2. NEVER FORGET RULE NUMBER ONE.
RULE 3. VIEW INVESTING IN STOCKS THE EXACT SAME WAY YOU VIEW BUYING
AN ENTIRE COMPANY.
RULE 4. ONCE YOU FIND A BUSINESS YOU LIKE DETERMINE ITS VALUE.
RULE 5. THE ONLY WAY TO PROTECT YOUR MONEY IS TO BUY THE BUSINESS
WHEN IT’S SELLING FOR A SIGNIFICANT DISCOUNT TO ITS VALUE.
And that leads me to the art of buying $1 for .50 cents.
If I offered to sell you $1, would you be happier paying .50 cents
for it or .75 cents for it?
Most of us would be happier paying .50 cents for it.
Why?
Because we’d all like to pocket the extra money.
What we do here at Fallen Angel Stocks is similar: we have a list of
great companies with very strong underlying businessess.
But instead of paying .90 cents on the $1, we try to buy them for .50
cents on the dollar.
And that means we oftentimes have to wait for a short-term problem
to send the stock low enough for us to buy a real bargain.
But when we get a chance to buy a good company at a cheap price,
our chances of making money are VERY HIGH.
And that brings me to Miami Heat Center, SHAQ.
Arguably the most important reason that Shaq is the most dominant player
in basketball is that his sheer size allows him to sit virtually underneath
the basket and make high percentage shots all day long.
In fact, Shaq scores 60% of the time he shoots (#1 in the NBA).
In contrast, Damon Jones, formerly from the Miami Heat, is arguably the
best 3-point shooter in the NBA.
He makes 40% of his shots.
What does this prove? It proves that the closer you are to the basket,
the more likely you are to get it in.
And the way we get “close to the basket” is to buy Fallen Angel Stocks
for .50 cents on the dollar.
–Enjoy, Dylan Jovine