In a previous issue of Kiplinger’s magazine, Kathy Kristof wrote a column that compare’s the lessons learned in the movie Moneyball with investing advice. For those that haven’t seen the movie, Moneyball is a baseball movie about the Oakland Athletics General Manager Billy Beane. The A’s are a small market team meaning they can’t spend a ton of money on high priced free agents. They have to find a way to win with a small payroll. Beans accomplishes this by looking at statistics of players and building his team around this. It very interesting, even for the non baseball fan.
Kristof takes the lessons from the movie and applies them to investing. In summary they are:
- Don’t believe your eyes
- Capitalize on inefficiencies
- Don’t watch the game
- One game is not a season
- Experience reduces risk
I love all of the investing lessons. Not believing your eyes is the same as not allowing your emotions to get involved. Just because you see a “hot” stock rise day after day doesn’t mean it will continue to do so. There will come a point when investors will feel that it is overvalued and begin selling it.
Related to this is lesson 3, don’t watch the game. Watching what the market does every day may make you to act in a way you normally wouldn’t. You let your emotions to enter the game and many times we make the wrong choice or decision when we act on emotion.
Great investors capitalize on inefficiencies. Corporations all have bad periods. When this happens, investors beat them down by selling the stock, forcing it down. When the price drops on a good company, that is the time to buy. Your strategy here would be to identity a handful of stocks and do the research to see if they are over valued or under valued. If they are over valued, determine the price that would make them under valued and wait until they hit that price. Then you buy.
In the grand scheme of things, one game is not a season. Similarly, one stock is not your entire portfolio. You can have some losers in your portfolio. As long as you don’t lose your shirt on those investments, you will come out ahead.
The longer a corporation has been in business, the more you can see how it handles both the good and bad times. A newer, smaller company doesn’t have this history. The length of time in business reduces the investors risk. This is because you see that historically, the corporation can handle the bad times without going belly up. This is not to say they never will go belly up, but the chances of it are less likely than if they are a new corporation.
Readers, what are your thoughts on this list? Would you add any lessons to this list?