Grow Up: Successful Investors Hustle
Jane is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Yes, of course, some individual and institutional investors created, preserved and grew their wealth in equities through illegal activities such as insider trading at the former Galleon Hedge Fund. The Department of Justice has been unmasking lots of that. Also, before the Facebook (NASDAQ: FB) IPO, certain favored financial groups might have received information that the value of the company was being re-evaluated and downgraded
However, simultaneously many ordinary people have been making a good buck in equities. They may or may not be maximizing their possible return as had some of the Galleon traders. But they are doing okay enough often enough to stay in the market. The reason they are is because, like Berkshire Hathaway's Warren Buffett, they understand certain industries, make it their business to analyze in detail particular companies, and are patient. In short, they refused to fit the classic definition of "passive investor." They might not, as do professional security analysts, fly overseas and check out companies' suppliers in China or India. But they do search for information and insight which are not readily available to the public. Also they probably have an integrative intelligence which can connect the dots.
Here is a typical example from the past about exactly that kind of investor. That is, he had certain expertise, was alert, did some digging, bought, and made money. Call him Peter. He is from a long line of lawyers and was studying business at Brown. He took a part-time around the corner in the deli at the Rhode Island State Court House where the lead paint trial was taking place. He overheard those associated with it commenting on the judge’s ongoing rulings, poked his nose in the courtroom after his shifts, and noticed three of the four defense lawyers were white shoe and the jurors were blue collar. Based on that, he went long on defendant ARCO, now owned by BP (NYSE: BP), and short on defendant Sherwin-Williams (NYSE: SHW). When the jury verdict comes out February 22, 2006, he made the lion's share of the next year's tuition. That might not have turned out that way but it did. With investing there are no guarantees.
Here is a more recent kind of hypothetical. As you know, Goldman Sachs (NYSE: GS), in the spotlight for alleged leaks, has become a symbol of what is shaking investor confidence about getting a fair deal in equities. However, you can look at it this way: Leaks which are illegal often provide the same kinds of data which a seasoned individual investor might have been able to put together anyway. Think about it: GS would have to require its executives and even rank and file to work, eat, travel, use rest room facilities, and play sports in total seclusion in order to prevent giving off signals about what could be going on in the company.
Suppose an executive there abruptly called off a tennis game with John. John knows a lot about the online video business. At his club he noticed other executives from GS talking with a few leaders in that industry. It was casual. But isn't that exactly the way things can begin. John has been predicting M&A activity among online video players. He narrows down possible scenarios going on and with who. He bets long and short. He is wrong on the short side and, through that overall transaction, loses money. But, his confidence in equities and his methodoloy is not shaken.
Here is another hypothetical, one with a profitable ending. Last January, Martha, who lives in a town near Plano, Texas, reviewed the fundamentals such as ratios for P/E and intangibles, debt level, cash flow, margins, net earnings as well as analyst reports on J.C. Penney (NYSE: JCP). A freelance coder, she asked her contacts at Apple what the chief executive officer Ron Johnson had been like there and if Steve Jobs kept him on a short leash. The underlying issue was: How able was he to operate on his own. She walked around both its stores and competitors’ sites in a number of locations. She talked with customers and clerks. She shot the breeze with her neighbor whose son was interning at Penney headquarters in Plano. She got a part-time waitress job in a bar near that headquarters. She shorted the stock.
In this current crisis of faith in equities, too many Everyman investors seem to have a blind spot about how much fundamentals about the company, background in a field, watchfulness, ability to discern how factors could impact each other, and timing determine making and losing money. If they didn't, there would be fewer passive ones. Instead they would take the time to do the same kind of eclectic due diligence that successful investors do. The game isn’t so much rigged as it is dependent on myriad bits and pieces of data that many individual investors don't bother gathering, assessing what are connections among them, and trying out scenarios about how all that could impact the company's value.
janegenova has no positions in the stocks mentioned above. The Motley Fool owns shares of Facebook. Motley Fool newsletter services recommend Goldman Sachs Group and Sherwin-Williams. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.