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Wednesday, April 28

Warren Buffett and His 20 Punches

Our favorite holding period is forever...

I remember how exciting it was when I opened my very first brokerage account. I was eighteen, and smitten by the idea of owning a piece of America. I readily funded my Charles Schwab account and started trading. The problem was, I was trading.

When someone asks me if I trade stocks, my answer is "no, I invest in companies." Watch too much CNBC and you'll be convinced everyone who is "in the market" must keep their eyes glued to some 50 day moving average chart with their fingers ready at the keyboard to hit "buy" or "sell" based on some trend they have uncovered. It's important to keep in mind that for every buyer in the market, there has to be a seller. So for every person who thinks he is selling at the top, there's someone else out there who thinks he is taking a position that is sure to go up.

Warren Buffett introduced me to a wonderful exercise a few years ago: imagine you have a ticket with only 20 punches on it. Every stock trade receives one punch, and after twenty punches you are done trading... for the rest of your life. The purpose of this exercise isn't to say you will only trade 20 times in your life, but it's not far from it: with every investment you make, take your time to decide if it is right for you. Unless something materially changes with the company in which you have invested, or your own personal financial needs change unexpectedly, stick with that company.

By doing this, not only do you reduce your trading costs and taxes, you also force yourself to do your due diligence. When I was an inexperienced 18 year old with a couple thousand in the market, I thought every stock I read about in Forbes was sure to skyrocket. Of course, with the next issue there inevitably would be a company I liked even more and I would have to sell one stock to buy the new one.
  • Know the company before you invest.
  • Set guidelines for what conditions will cause you to sell. Keep it in writing.
  • Instead of searching for the next investment idea, spend your research time learning more about the stocks you already own.
Tomorrow... Diversification is for dummies.

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