The Aleph Blog » Blog Archive » I Have My Doubts

I Have My Doubts

I try my best at Aleph Blog to phrase things in a way that conveys my level level of certainty.  But I have my doubts.  Learning to live or deal with doubts is a hallmark of a good investor.

So as the stock price drops, drops, and drops again, what do I do?  I reread the fundamental data to see what I might have missed.  I read contrary opinions.  Then I ask the question: knowing what you know now, would this qualify to be in the portfolio?  If not, I sell it.  In rare cases, if I think it is unfairly trashed, I will make it a double-weight.  So far, I have not lost on anything I made a double-weight.

All investing involves doubt.  We don’t know the future; we are making educated guesses at best.  Am I sure about future earnings?  No.  Do I know what industries will outperform?  No.  In general I have done well with both, but it is an art, not a science.

I like my methods, partly because they are designed to live in a world of uncertainty.   Why do I diversify?  Uncertainty.  Why do I do rebalancing trades?  Uncertainty.  Why do I limit my ability to trade, except at mid-quarter?  Uncertainty.  Why do I focus on value and use of free cash flow? Uncertainty.

I could go on and give the same answer: “Uncertainty.”  My methods attempt to thrive in uncertainty by choosing factors and companies that seem to be able to do well given uncertainty.

I don’t always win, but my wins have exceeded my losses versus the market over the last 13 years.  Does that mean I will do as well over the next 13 years?  No.  I mean, I hope I do as well,  but there is no guarantee.  The math on investor performance is such that Bill Gross and Warren Buffett could be random flukes.  I don’t think they were lucky — I think they were skilled.  But the statistics won’t prove it.

I also have my doubts about the US economy.  Is it growing?  Is the labor market healthy?  I don’t know.  Short-term data is volatile.  Wise investors will wait and see, unless they have a differential insight that most others do not have.

I lean toward the idea that things are weak,but I don’t know that for sure.  Thus I seek for contrary data.

This is the life of the investor who has ideas, but knows they might be wrong.   What will happen to my overweight in Energy?  Am I overexposed in Tech and Insurance?

In the end, doubts are a part of investing.  You can’t avoid them, despite hard work in analysis, because you can never know what you missed.

That said, when my doubts grow, and the price has not fallen in tandem, I sell.  My quarterly purge of a few companies lets me express my doubts, but in a reasoned way, not merely responding to a fall in the stock price.

Therefore, be reasoned in your decisions in stock investing, and always be forward-looking, because you can’t change the past.

Portfolio Management, Stocks, Value Investing | RSS 2.0 |

5 Responses to I Have My Doubts

  1. JoseOle says:

    David: Only trading one day per quarter seems overly rigid. Churning is bad in general, but if you identify an opportunity that meets all your pre-reqs for replacing a position in the portfolio and the pre-determined trading day is many weeks away, over the long haul this seems like a recipe for alpha destruction, not generation.

  2. JoseOle says:

    Not saying nuts. I just don’t see why you’d want to sit on a well researched idea for weeks since it could run away on you, that’s all.

    • I compress research into one part of each quarter, in the middle, after earnings are done, and things are quiet — between those times, I gather ideas, but don’t think about them much. I also try to forget where they came from so that during my research period, I analyze them afresh.

      Occasionally I will make changes off cycle, but that is rare. Time is not of the essence in most of my investing. Most of the companies I own don’t generate much news.

  3. JoseOle says:

    Thanks, I understand now. I hadn’t appreciated that your evaluation process was chunked rather than continuous.


David Merkel is an investment professional, and like every investment professional, he makes mistakes. David encourages you to do your own independent "due diligence" on any idea that he talks about, because he could be wrong. Nothing written here, at RealMoney, Wall Street All-Stars, or anywhere else David may write is an invitation to buy or sell any particular security; at most, David is handing out educated guesses as to what the markets may do. David is fond of saying, "The markets always find a new way to make a fool out of you," and so he encourages caution in investing. Risk control wins the game in the long run, not bold moves. Even the best strategies of the past fail, sometimes spectacularly, when you least expect it. David is not immune to that, so please understand that any past success of his will be probably be followed by failures.

Also, though David runs Aleph Investments, LLC, this blog is not a part of that business. This blog exists to educate investors, and give something back. It is not intended as advertisement for Aleph Investments; David is not soliciting business through it. When David, or a client of David's has an interest in a security mentioned, full disclosure will be given, as has been past practice for all that David does on the web. Disclosure is the breakfast of champions.

Additionally, David may occasionally write about accounting, actuarial, insurance, and tax topics, but nothing written here, at RealMoney, or anywhere else is meant to be formal "advice" in those areas. Consult a reputable professional in those areas to get personal, tailored advice that meets the specialized needs that David can have no knowledge of.

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