Wednesday, September 3, 1997
To Teach Is to Know
by
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I like to delude myself into thinking I'm a rather sophisticated investor. I've been steadily putting my money into the market for the past three years and patting myself on the back for the decent returns my portfolio has been generating. If I'm making money, then I must know what I'm doing, right?
I casually mentioned to a couple of co-workers that I was a stock-market junkie, and that comment alone was the impetus for forming a small investment club with my co-workers. Since I was the only person with any investment experience, I was elected to create the curriculum, lead the meetings and demystify the investing process.
I couldn't wait for our first meeting. I wanted to dispense my wisdom to these neophytes and have them worship me as an investment goddess. At our first meeting, I described what the stock market was, why they should be in the market, the basics of a discount brokerage, etc. When a member asked me how we identify companies to invest in, I responded, "We should identify the top three industries and the top companies within those industries with the best growth rates." What a no-brainer question, I thought. The next question was innocent enough: "What are the top three industries?"
I stood there at the white board, stunned for a bit and managed to stutter, "I don't have that information now. I'll look into it." There I was, giving investment advise that I have never followed in my entire investment career. If any of the stocks I owned in the past were in the top three industries, I didn't know it. What a hypocrite!
I thought I'd save face by dazzling them with a spiel about P/E ratios. Mathematically, it's easy to figure out. After teaching my fellow members how to calculate it, I was asked another innocent question: "What does it mean?"
Again, I stood there, momentarily speechless. I dribbled on about how a high P/E ratio meant that a stock is overpriced and a low P/E ratio is regarded as a bargain. But in the back of my mind, I knew I had no idea what I was talking about. Then I remembered how I bought a couple of stocks with very high P/E ratios and made a killing with them. And to my chagrin, I recalled buying a couple of stocks without even bothering to find out what the P/E ratios were.
These innocent questions, ones that a three-year-old would ask, were killing me. Easy things like "when should I buy," "when should I sell," "what should I buy," "what does it mean," made me take a good hard look at my own investment strategy. Why did I buy Netscape? Because the stock slumped and I thought it couldn't go any lower. Of course, it did. Why did I buy Starbucks? Coffee is a drug and people will get addicted. Did I know what the P/E ratio was? Did I bother to check out the cash flow or the debt or margins or earnings growth? Of course not. Would I teach these members to invest this way? Of course not!
The next day after the meeting, I ran over to the library and spent a couple hours going over the Value Line books. Then I defined what my investment goals were and my requirements for buying a stock. I rushed home and ruthlessly re-evaluated my portfolio. Immediately, I sold stocks that didn't fit my strategy and bought stocks that did.
What a humbling experience. Even through all my stock bungles in the past, I managed to make money. But that didn't mean I knew what I was doing. I was extremely lucky.
I now consider myself a rehabilitated investor. Joining this investment club made me set rules and guidelines for my own personal investments. It forced me to understand concepts and apply them before I educated others about it. If I couldn't explain these concepts or terms well, then I didn't know what the heck I was talking about.
To teach is to know!