Tell me, what's the most exciting share you own -- and why is it so?
Personally, the most exciting share I own is always the one I just bought, whose price I watch keenly. This is a fundamental mistake borne out of the yen for excitement.
This is because I watch the market far too closely, and end up with too many small positions that didn't quite work out the way I planned. It's often said by cynics that a long-term investment is a short-term trade gone wrong, and there's a lot of truth in that. But as long as it's kept in its proper place, there isn't too much wrong with having a fun punt now and again if you can afford it.
But there is a lot wrong with placing too much monetary faith in such investments, unless you're one of those truly rare beasts: a continually successful trader.
For the rest of us, the most exciting shares we own should be allocated an appropriate percentage of our portfolios until they've proved themselves. As Warren Buffett's business partner and Berkshire Hathaway's vice-chairman Charlie Munger says, proper allocation of capital is an investor's number one job.
In a word: "research"
Having said that, I know quite a few highly successful investors who invest significant proportions of their wealth in what many would consider to be speculative investments.
If we consider, for example, some of the companies in which some well-known and wealthy private investors told us they were investing their cash during the autumn, you'll see some really small caps on there. And on the whole, their performance has been truly excellent.
Taking one particular investor as an example; David "Carmensfella" has seen a mean average increase in the value of his top six investments of 31.6% since he shared the details with us on Halloween. Over the same period, the FTSE has added just less than 3%. Not one of his six has lost ground.
Even more impressive is the fact that Carmensfella will have fared a lot better in reality as his largest holding, theme park queue-busting Lo-Q has been the star performer, putting on over 85%.
Clearly, this was David's most exciting share. He put his money where his mouth was and told us all about it. Yet to many wise old heads, this would have appeared to be exceedingly unwise. A large part of your pot devoted to a small cap AIM-listed techie on a demanding rating; are you mad!?
The key word here, of course, is research. To say David goes the extra mile in thoroughly researching small companies in which he makes big investments would be an understatement. These aren't flying speculative punts, but they are exciting.
The legend agrees
Nevertheless, the approach taken by David -- and other investors featured in the series -- wasn't at odds with what the experts tell us. To go back to Charlie Munger's words of wisdom, he's in favour of investing big when there's good reason. saying:
- Good ideas are rare; when the odds are greatly in your favour, bet (allocate) heavily.
- The only way to win is to work, work, work, work, and hope to have a few insights.
- More important than the will to win is the will to prepare.
- Be alert for the arrival of luck.
He also cautions against allowing our heads to be turned too many times in too many directions, saying:
- Remember that highest and best use is always measured by the next best use (opportunity cost).
- [Show...] patience; resist the natural human bias to act.
- Avoid unnecessary transactional taxes and frictional costs; never take action for its own sake.
I know I'm guilty of failing to heed this advice. But I also put my money where my mouth is in well-researched small caps.
So if your most exciting share is a speculative punt and the last, or one of the most recent, you've bought, you may be as guilty as I am from time to time of a lack of commitment and research. On the other hand, if it's a company you've thoroughly researched more than almost any other investor due to its small size and factors you know better than just about anyone else, please tell us about it.