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"Know what You Own" has Limits!
In less than two minutes I'll explain to you why one of the best known investing rules, that you still believe in, is flawed.
“Know what you own!”
That’s one of the golden rules of investing. Understanding a business is the foundation for every investment you make.
Without understanding the business, you can’t come up with reasonable estimates of the future financial strength of the company.
Without reasonable estimates of the future financial strength of the company, you can’t come up with an estimate of intrinsic value.
Without an estimate of intrinsic value, you can’t find out what price to pay for an asset.
You see, knowing what you own is crucial.
But why do I say there are limits to this rule?
Because we tend to lose the important things out of sight, successful investing is about seeing the whole picture and not getting lost in details.
There are two groups who lose big time when markets reach extremes. Group 1 are the people who know too little. They invested in the hype because everyone does so. Group 2 are the people who “know too much.”
Now you’ll ask yourself, how can you know too much?
Too much is when you get lost in details that do not matter. They don’t drive the stock. Even more important, they don’t drive the fundamentals of the company.
In an ideal world, you know everything about the company, and you remain neutral. When the facts change, so do your opinions. But we don’t work that way.
There is a turning point where more information is only reinforcing the opinion that you hold at that exact point in time. When you believe the company is great and has huge upside potential, after the turning point, every new information will be interpreted to reinforce that opinion.
That’s why we must be very cautious about how much information we consume. Now, most people spend way too little time researching a company. For those people, this is not meant to be an excuse to keep doing that.
But maybe you belong to the group of people who dig very deep when researching companies. If you do, I feel you. But we need to try and develop a feeling for the turning point.
Reflect on whether new information is still adding value to your opinion or just reinforces your current beliefs. This sounds tough, and it is, but if you’re honest with yourself and systemize this, you can do it.
I systemized this by using Psychology Checklists for my investments. They’re part of my Investing Checklist System (Free for every Paid Subscriber / $1.99 for every free subscriber for one week, then $4,99).
Don’t be afraid that you will have too little knowledge about a company when you stop your research at that point. At the turning point, you have all the knowledge you need to develop an assessment of the company.
If you don’t know by then, put the company on the “too hard” pile, as Buffett would say. It’s not worth it.
Those were my two cents on this old, and important (!), investment rule. Let me know what you think!
Ohh, on Wednesday, November 1st, I’ll publish my monthly Deep Dive for paid subscribers. This time, it’s about Alibaba and the Chinese Economy. Upgrade if you’re interested in that.
I promise, all the information in there is relevant, and you won’t know more than you need to make a reasonable investment decision ;)
Now, have a great day!