A Time for Q&A and Other Ramblings: Issue 1

This slot in our post schedule for ModernGraham is devoted to a Question and Answer session. Since this is the first time we’ve done this, we only have one question which is addressed below. However, if you have a question that you would like our thoughts on, please email ben@moderngraham.com and it may be addressed in next week’s issue.

Our only question this week (from Abuelo’s comment on yesterday’s post) is regarding our portfolio tracking and whether or not we will be continuing the portfolios. At this point, we are not planning on continuing the defensive and enterprising quantitative portfolios (Low PE, Value, and High ROIC) because of issues with our computer data systems. I had created an Excel spreadsheet that downloaded data to screen for companies that fit the portfolio requirements, but we are having difficulty obtaining the data to continue this process. Rest assured, we have received numerous requests that we continue the portfolios and are exploring options to replace or fix the issues. One option that we are exploring is a web-based utility that is in the works (that is all I can say about it at this point). Also in response to Abuelo, Jon and I started designing the blog in July 2006 with our first post on

The second part of this post is for ramblings and insights straight from my mind. With Halloween around the corner, I’d like to talk about the emotion of fear and how it can play a role in investment decisions. Fear is a reaction that we all hold at some point on a regular basis. Most of the time we are capable of controlling our fear and not letting it affect us. Despite the regularity of fear, it is paramount to the intelligent investor to leave the emotion behind when conducting research or investment decisions.

We must keep our fears out of our investment decisions because when we are under the influence of fear, we act irrationally. An irrational investor is not an intelligent investor. Since all investors often speak in terms of abbreviations and acronyms, let us refer to the fearful investor as one who is UIF (Under the Influence of Fear). Being UIF should be considered a crime to the individual (obviously it shouldn’t be a crime in the sense that it is punishable by the government) and the individual should teach themselves to recognize the situation and react accordingly. How can you tell if you are acting under fear? Let us examine a couple of symptoms:

1) Refusing to examine a security that has fallen in price simply because you believed it was a value when you purchased it. The problem here is that things do change and even if we are correct in finding a value one day, it is possible that the conditions within the company have changed and we would not find it suitable as an investment today. You must ask yourself, why continue to own something that I wouldn’t buy today?

2) Selling a security immediately upon hearing bad news for the company and seeing the rest of the market sell as well. We must remember that the market almost always overreacts initially. In addition, when news breaks out, the response time is so quick in today’s semi-strong efficient economy that it is impossible for the individual investor to avoid the initial drop in price. In other words, if you’ve already lost 10% on day one, why not risk losing 2-3% in the next week so you can have time to conduct proper research and decide for yourself if the news merits a sale?

3) Buying because we fear holding cash and missing out on market-wide gains. In a perfect world, we would be able to find a new purchase immediately upon selling a security. However, the world is not perfect and there is often a period between holdings when we have cash on hand. The problem is that we are often fearful that we will miss out on big gains in the market if we do not hold anything. This leads some to buy without properly conducting research. Instead, you should remain rational and put your cash in a highly liquid environment like a money-market fund. Another good option would be to buy some 4-week T-Bills during your downtime – that would give you a risk-free return while forcing you to wait for 4-weeks and think about your investment options.

That’s it for this week. Keep in mind that intelligent investing is a long-term goal and that fear is a short-term reaction to a situation.

If you have any questions for me that you would like to have addressed in next week’s issue, please email me at ben@moderngraham.com.