Dear reader,

A few years ago, I opened up a internet brokering account and started investing in stocks. The main reason for this was the expert problem and my doubt about handing my saving to professional to invest. My savings are that humble that using up time and resources to study and learn how to invest it doesn’t seem cost efficient. But in my view (1) it is a good opportunity to study my own decision making (therefore the diary), (2) by trading my own money (as opposed to participating in on-line stock market games or using shadow portfolios) my guess is that I stimulate other brain areas, basically my theory is that by learning by trial and error I gain cognitive experience and (3) by posting my trading diary online I expose myself to criticism that in effect could speed up my learning curve.

I’ve made a short summary of my strategic themes, I kind of manual for myself.

Markets are in-efficient and stock prices do not always reflect the real intrinsic value of the underlying asset.

“What counts, however, is intrinsic value – the figure indicating what all of our constituent businesses are rationally worth. With perfect foresight, this number can be calculated by taking all future cash flows of a business – in and out – and discounting them at prevailing interest rates. So valued, all businesses, from manufacturers of buggy whips to operators of cellular phones, become economic equals.”

– Warren Butten, Letter to Shareholders, 1989

With time, I have stopped looking at earnings as they “can be as pliable as putty when a charlatan heads the company reporting them”. Ben Graham wrote a very entertaining satire on this issue. In fact, I try to be very careful in using any kind of yardstick that is meant to reflect value.

“Common yardsticks such as dividend yield, the ratio of price to earnings or to book value, and even growth rates have nothing to do with valuation except to the extent they provide clues to the amount and timing of cash flows into and from the business. Indeed, growth can destroy value if it requires cash inputs in the early years of a project or enterprise that exceed the discounted value of the cash that those assets will generate in later years.”

– Warren Butten, Letter to Shareholders, 2000

I use debt sparingly and when I borrow I earmark assets that I would use to cover them if I have to.

I have to main sources of leverage. I have to my disposal a credit that amounts to 40% of the value of my assets at my broker account. I use this very sparingly. Also, I can by derivatives that are called Sprinters from ING, that are basically leveraged long or short contracts in stocks, commodities, indices or currencies. Those too, I use very sparingly.

I try to focus on companies that I can understand

My background is in sports marketing and retail, so concentrate on sports business. However I try to diversify by looking at indirectly connected companies that compete over the same profit pool.

I don’t (at least intend not to) forecast, predict or use precise numbers

“You would expect our record of prediction to be horrible: the world is far, far more complicated than we think, which is not a problem, except when most of us don´t know it. We tend to “tunnel” while looking into the future, making it business as usual, Black Swan-free, when in fact there is nothing usual about the future.”

– Nassim Taleb, Black Swan

I am skeptical about stories and with using the past to predict the future

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