Ch11: Grab the Stick

Even if we did everything totally right and didn't make a mistake, couldn't the stock price go down in the short run and cause us to lose money? We need a solution to this problem.

Solution #1: PRETEND

Never say to yourself that even though the stock gone down in price, as long as you don't sell it you haven't really lost any money.

Solution #2: MAKE UP THE DIFFERENCE

Warren Buffett fills the hole by making more money in some other short-term investment. However trading is a more advanced technique and requires more time and training.

Solution #3: DON'T LOSE MONEY IN THE FIRST PLACE

Institutional funds make up the market. They control the price of any stock they're investing in. If they put more money in, the price goes up. If they take their money out, the price goes down.

This means that even a biz that's on sale for 50% below its Sticker Price could go down some more in the short run if the fund managers keep selling it, even though, rationally, it shouldn't. Institutional fund managers only really acre about the short-term success -- how much they can make in the current quarter.

Events themselves don't change the stock price; institutional money moving into and out of the market in response to these events is what changes stock prices.

TOOLS

We should exploit our size advantage to move nimbly. It takes a typical fund manager about 6 to 12 weeks to get in fully invested in a stock or to get completely out.

The tools are great for 2 reasons:
1. They lower our risk of losing money
2. They eliminate emotional rule of investing (Murphy's law)