That Burning Stove Is Oh So Tempting to Touch

Margie is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

It’s hard to stick to your investment thesis when the market moves against you. Near the end of the .com bubble I was having lunch with a broker at Morgan Stanley, and complained that I had no idea how people were willing to pay 500 times earnings for anything .com, and stated I didn't understand how it couldn't come to an ignominious ending.

He laughed and said, “Of course it will come to end, but in the meantime, don’t you want to make money? Where are you putting your money?”

“I was thinking of buying some stock in Phillip Morris (NYSE: PM),” I replied, “Seems to be trading really cheaply as the government is suing them. I think investors are reacting as though the company will go out of business. If the government wants to collect, I don’t think they are going send the company to the great beyond.”

“Phillip Morris, what are you crazy? No one wants that stock,” he explained, a look of incredulity on his face that I was even allowed to participate in this conversation.

So what did I do? I admit it, I was swayed. Who was I to counter the opinion of this “professional.” Of the $30,000 I had saved to invest in Phillip Morris, I put $20,000 of it in .com stocks and only 10k in the beleaguered tobacco company. And what happened? The $20 K dropped nearly off the face of the earth, I think I might have had enough left over for coffee and a sandwich, and the $10 K in the stock no one wanted danced up and today, more than a twelve years later, I might have have regained my principle.

Learn not Burn

So, a fair question many of you might be asking is how is the time I just spent reading this little story going to help make me money?

Simple: The most efficient way to learn is from those who have already experienced the hard lessons. Of course, you can tell your children not to touch the stove, but very few of them will resist the overwhelming urge to be burned.

Stick To Your Guns

As human beings, the majority of us seek safety in numbers. This is literally a herd mentality where if you stick with the group, with the consensus opinion, you are less likely to be picked off by predators. We generally believe that others somehow know better or more than us, and we gravitate to listening to people who sound the most certain (and I’m thinking of people like Jim Cramer here) who often lead us to our financial demise.

My mistake: My instinct, intuitions, and research regarding Phillip Morris was spot on, but I allowed myself to get swept back into the psychology of the herd. After all, it feels safer, right?

When you work or regularly operate in a field, see market trends as they occur ahead of analysts reports, and have done your research, you are the expert. Don’t let yourself be dissuaded from your position because some loud mouth is ranting against you. stick to your guns.

But Be Flexible

I recently wrote a bearish article regarding what I saw as Research In Motion’s (NASDAQ: BBRY) declining market share, and the longs had at me. But, in seriousness, there actually were a couple of comments/ emails from RIM longs who had a different, and well stated point of view that I tried to consider and weigh.

I might stick to my guns in the end, but I always allow the possibility of changing my opinion based on new information previously unknown. We all know people who get an idea in their head and come hell or high water nothing’s gonna change their mind, til they charge headfirst into a proverbial mountain believing they will knock it over with sheer force of mind. Generally we acknowledge them to have an IQ on par with a rhino.

Who To Learn From?

Warren Buffett and Charlie Munger of Berkshire Hathaway (NYSE: BRK-B) always come to my mind first. They have an absolutely proven track record that simply cannot be deemed “random” and following their pearls of investing wisdom (if you truly do) will undoubtedly lead to better returns for you.

Heck, I don’t just listen, I’m long Berkshire because Warren gets deals no other individual investor ever could. (For example, with Bank of America (NYSE: BAC) he got Berkshire shareholders, “Under the terms of the deal, Berkshire will buy $5 billion of preferred stock that pay a 6 percent annual dividend, and receive warrants for 700 million shares that it can exercise over the next 10 years. Bank of America has the option to buy back the preferred shares at any time for a 5 percent premium.”

Take Away

I think some investors want to prove how clever they are, and try to re-invent the wheel when it’s completely unnecessary. Learn from others and my own mistakes, and model those who are truly successful.

The two things that separate the good investors from the bad ones:

  1. Proper research and knowledge of what they are buying
  2. Psychology

My hope is that for a select few of you, you will take these lessons to heart, and maybe, just maybe, avoid touching the burning stove. 

margiecfl has long positions in Philip Morris, Berkshire Hathaway, and Bank of America. The Motley Fool owns shares of Bank of America. Motley Fool newsletter services recommend Berkshire Hathaway. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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