5 Reasons To Doubt My Analysis


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by Daniel Sparks

writer at

the Motley Fool

 

With the growing influence of securities analyst recommendations and the proliferation of financial bloggers, there is good reason to question their usefulness. Although probably not a surprise to anyone, I think it’s worth some discussion: Just because I invest in a particular stock does not mean you should invest in the same one, or vice versa. There are just too many outside factors to consider: allocation, personal conviction, available capital, time horizons, investment philosophy, circle of competence, etc. But this does not discredit the stock analysis write-ups and recommendations of financial bloggers. In fact, financial bloggers can be a great resource for your portfolio . . . if you approach them skeptically.

So without further ado, 5 reasons to doubt my analysis:

1. Your investment framework differs from mine

It’s perfectly fine for investors to have investment frameworks that differ from each other. Though I’m a huge critic of day-trading, I find it beneficial to approach investing with an open mind so I can take in varied perspectives and use them to “innovate” my own. Due to his huge reliance on psychology in his day-trading success, I was compelled to read The Inner Voice of Trading, by Michael Martin. This pretty much sums up the underlying philosophy in the book:

To succeed in the stock market, a trader should aim to understand his inner voice and find a trading system with which his psychological make-up is compatible.

Psychology plays a huge role in investing. Michael Martin sums it up well:

“Unfortunately, most aspiring traders find out far too late that the act of trading is 20% intellectual and 80% psychological” – Michael Martin

(click to tweet this quote)

For this reason, individual investors often (and should) have slightly different approaches to investing. “It’s a complete fallacy to think that having a trading system will annul strong emotions” (Michael Martin). Therefore, individual investors should cater their investment framework to their psychological make-up while still demanding rationality.

Does Michael Martin sound interesting to you? Check out my book review of The Inner Voice of Trading.

2. Your level of conviction differs from mine

Even if you manage to buy a stock at the same price as your favorite guru, your level of conviction regarding the pick probably differs immensely. This will, no doubt, affect your sell decision down the road and could end up costing you some serious money.

3. Your circle of competence differs from mine

I have trouble understanding many companies. In fact, sometimes I feel stupid compared to other financial bloggers and securities analysts out there that so easily hold opinions regarding such a wide range of stocks. My knowledge is very, very limited and I am completely clueless regarding the sustainability of many different business models and industries. Stay within your circle of competence. If you don’t understand where cash is coming from, how management uses it to create value, and how sustainable this stream of cash flow is . . . don’t invest in it–even if your favorite guru thinks it’s the hottest thing since Google.

4. Your time horizons differ from mine

I could probably say that most value investors are long-term, buy-and-hold investors. But this does not mean we are all investing with the same time horizons in mind. An investor with only $30,000 to invest probably has a drastically different time horizon than someone with $5 million of discretionary cash, whether they realize it or not. What exactly is long-term anyway? 5 years? 10 years? 5 years is quite a bit different than 10 years. And even if we say we have a particular time horizon in mind, is that really our time horizon? Take a look at your portfolio turnover. Does it really look like your investment time horizon is greater than 5 years?

5. I make mistakes.

I make mistakes. In fact, I make huge mistakes. It’s part of investing in the stock market. Even if I’m making money, good outcomes do not mean that the underlying process to achieve these returns was a good one. How much risk did I take to achieve above average results? Was I lucky? Or, on the other side of the coin: When a guru does not have successful outcomes, it doesn’t mean he is a bad investor. Perhaps his process was nearly flawless and he has simply witnessed a bad string of luck. No matter how much we wish our success and failure was all dependent on skill, it’s just not the case. Luck plays a huge role in investing.

Want to take the hassle out of finding, detailed number crunching and grading stocks? Streamline the process with an easy to use systematic method so that you can focus on the important tasks. Click here to use the live demo of old school value stock grading and valuation tool today.

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