Friday, June 20, 2008

Sophisticated Investor

Some possible stigmata of a sophisticated investor:

Not overly reluctant to selling losers. Is aware of "loss aversion."
Tends to keep winners. Knows that, to quote Mr. Lynch, people tend to "water their weeds and cut down their flowers."
Doesn't buy a stock unless he or she has a LOT of good reasons to buy it. The stock has passed a variety of tests.
Doesn't buy on tips.
Is typically a value/long-term investor. But willing to pick low-hanging fruit.
Has diligently read Graham and Buffett and Fisher.
Sometimes practices a modest form of market-timing. (Eg, he or she lightened up before the 2000 massacre.)
Knows that the stock market "will always do whatever makes the greatest number of people look foolish." (Anonymous.)
Knows that in the world of the stock market, "water does not always boil at 212 degrees F."
Knows that, to quote a Harvard economist, "reasons you read in the paper about why the stock market went up or down yesterday belong on the funny pages."
Knows that, to quote Wm. Bernstein, "Stockbrokers service their clients the way Bonnie and Clyde serviced banks."
At all times has a ballpark figure as to what his or her asset allocation is.
Knows that while that fellow Buffett can safely own an undiversified portfolio, the rest of us -- recognizing our limitations -- should worship at the altar of diversification.
Avoid load funds. And whole-life insurance. Is skeptical of advice from stockbrokers. And analysts on CNBC.
Is aware of the important distinction between gambling as opposed to investing.
Knows how much fun gambling can be. And how costly a diversion.
Keeps up with the Value Line Investment Survey. And Morningstar Mutual Funds.
Doesn't believe in the absurd efficient market hypothesis.
Has done very well indeed in the stock market.

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