If you have been following the blog throughout the year, I can easily slice the year in half and show the public two different ways of managing an investment portfolio.

1st half

The first half of the year was almost 100% automated with stocks chosen from the magic formula website. The only prerequisite that I required was that a company have a healthy balance sheet and some earnings. Sprinkle in a couple of non-magic formula stocks and WHALA! we have a portfolio that was ahead of the S&P 500 by a couple of percentage points.

2nd half

I had more time on my hands so I made a decision to move to a more researched and focused portfolio.Keep in mind this is at the exact time markets are selling off. I made big bets and lost big. I will go into details in another post, but to keep it short and simple, I made big bets and lost big.

WHY!!!!

Why did I lose big? The stocks appeared cheap. One of the lessons I have learned this year that will stick with me for the rest of my investment career can be best described by Warren Buffett’s obesity quote:

You don’t need to know if a person weights 250 or 400 pounds to see that they are fat- Warren Buffett

I see this happening all over the  blogosphere. A blogger finds a stock, reads a couple of 10-Q’s, 10-K’s, conference call,etc… The blogger then does a DCF trying to pinpoint growth and discount rates. The stock plummets and then he/she is left scratching his/her head as to why the stock is falling considering the amount of analysis in the growth and discount rates used.  The analysis and growth rates are sometimes right, but sometimes if one in fact looks up and away from the DCF models, one will notice the stock is indeed a fat pitch or not. Below Batman and Robin explain what I mean.

Charlie Munger (Berkshire Hathaway’s vice chairman) said, “Warren talks about these discounted cash flows. I’ve never seen him do one.”

“It’s true,” replied Buffett. “If (the value of a company) doesn’t just scream out at you, it’s too close.”