Averaging down is a skill. Done well it can be your greatest asset. Done poorly it can mean disaster.
One of my mentors in the business was a full time investor who had a big following. When I met him early in my investing career he showed me what to look for, how to talk to management, and even how to communicate a stock idea to others. He would
One of my mentors in the business was a full time investor who had a big following. When I met him early in my investing career he showed me what to look for, how to talk to management, and even how to communicate a stock idea to others. He would find a company he liked, buy a position for the A account (his) and then let some friends know about it. His network of investors would buy some stock, and if management executed, would buy more and more. This isn’t dissimilar to what I do as well as most others. Some of the stocks worked out and some didn’t. Whether the idea worked out or not, the network always respected him. Why? Because he always put his money where his mouth was and he almost always bought more stock than anyone else. So if the story didn’t work out, he normally lost more than anyone else, so you couldn’t exactly hate the guy. You actually respected him for that.
He had this saying “Put your money where your mouth is or shut your mouth”.
This ideology really stuck with me as my own network of investors grew and my investment philosophy took shape.
One of my biggest annoyances is someone that is enthusiastically bullish or bearish on a stock and doesn’t even hold a position. I mean that makes no sense to me. When an analyst or fund manager comes onto CNBC and they list the chart that shows the individuals “conflicts of interest”: Do they own it personally? Anyone in his or her family own it? Does their fund own it? CNBC wants to see NO’s across the board, but I laugh because I want to see YES! across the board. I want to know that this person has something to lose if this pick doesn’t work.
In the world of social networks, message boards, twitter, it is mostly all noise, but it doesn’t mean you shouldn’t invest and communicate with a higher standard. You gain the respect of investors not through words but through courage. You do this by being early, being right, and putting your money on the line.
If you talk about stocks publicly, and in particular in a more aggressive bullish or bearish tone, here are three codes to live by:
First, Don’t talk bullishly about a stock unless you own it and would buy it at the current price. Own your ideas. Act like an owner not like an analyst. If you don’t own it, it must not be that great of an opportunity. This goes for service providers in the industry like investment bankers and investor relation’s professionals. If you are a banker raising money for a company, how much are you personally doing of the deal? If you are a company’s outside investor relation’s person, how much have you bought of the stock with your own money? If the answer is zero, then I normally have zero interest.
Second, Don’t ever talk bullishly about a stock if you are selling it.
Third, Don’t be cocky. No one likes talking to, following, or hanging out with a know-it-all. If you think you are smart, wait a little longer. The only people constantly touting their gains are those trying to sell you something. You gain much more respect and adoration by humbling yourself rather than glorifying yourself.
When talking with another investor, the most important question IS NOT:
“What is your favorite stock?”
it should be..
“What are you buying at the current price?”
When talking about stock ideas an investor is most prone to talk about a stock they are up a lot in, not necessarily one they are buying. The easiest way to get around this is simply to ask what they are buying.
As a microcap company executes it attracts greater and greater waves of capital. As a microcap stock increases, liquidity increases, and larger and larger funds will take positions. The irony is the larger money can only buy them when the stocks are higher and more liquid. I spend quite a bit of time talking to funds that could be the next wave of buyer in stocks that I’m in. They look to me for ideas. They likely can’t buy them now, but if management executes, the stock increases, and liquidity increases, they can become a buyer. There is a mutual respect because they know whatever stock I’m pitching to them I own a significant position in, and I likely know it better than anyone else.
I normally start of the conversation; “I own 500,000 shares of XYZ company that I purchased between $0.40 – and $1.40 with an average of $0.75. I believe if management executes this could be a $5 in two years based on …….”
Through the years I’ve been right and I’ve been wrong, but investors that know me always know where I stand. I think it’s important to present yourself and your ideas in a respectful way. Especially for you younger investors, it takes years to build a reputation and seconds to destroy it. Set yourself apart from the noisy crowd. The financial media and others love to paint the picture that talking your book is a bad thing. That’s only because they don’t have the conviction to do it. Find great companies, put your money where your mouth is, communicate with integrity, and gain the respect of your peers.
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Nicolai Tangen is the CEO of Norges Bank Investment Management, Norway's $1.4 trillion sovereign wealth fund.
Dilution is the subtle erosion of ownership. This hidden, persistent addition of new supply of shares leaves shareholders with less and less of the company’s value. Dilution, like inflation, is a silent killer of returns.