Thursday, August 9, 2007

Lessons from the Pool

Hello everyone.
Tonight, I want to talk about a personal experience of mine and how it relates to investing.
Recently, I signed up for swimming lessons at the Harlem YMCA. I'm not the greatest of swimmers, even though I've taken lessons before. And since I know that I need to review the basics, I decided to enroll in the beginner's class.
To my surprise, on the first day, I saw a huge amount of older people in the class. And when I say older, I mean older. There were a few women in their late 50s and one in her early 60s. What struck me immediately was that these women did not let their age prevent them from learning a skill that's crucial.
Inspired by these women, one day during class, I volunteered to be the first to swim a full lap across the pool with a kickboard. I kicked as hard as I could and fortunately I made it across safely, but when I got to the deep end, I started to question whether I had the stamina to make it across. I could feel myself start to sink, and I realized that the only way for me to not die was to calm myself down.
So how does this relate to investing? Well, in order to be a successful investor, youi have to remain cool in the face of fear. It is impossible to trade/invest profitably when you are fearful. This is similar to the way that one begins to sink in the water once fear takes hold. Today, the Dow Jones Industrial Average index dropped 387 points, or nearly 3%. This is huge. And even though my portfolio consists of small-cap stocks - while the Dow is made up of large cap stocks - my portfolio still took a hit.
One of my stocks, First Marblehead (FMD) - a student loan services provider - was down 4% today and is down 16% overall. Why do I still hold onto it when it's being beaten so harshly? My reason is simple: I believe wholeheartedly in the long-term prospects of the private student loan industry. First Marblehead has a great balance sheet, sports a 3% dividend, is growing earnings and revenue at around 20%, and trades at 7 times next year's earnings estimates. Sometimes you have to hold your ground and wait for the market to turn around and recognize value.
To come back to my original point, swimming requires you to be relaxed and alert at the same time. The same can be said for investing. If you can't be relaxed in a stock market as volatile as the one we've had in the past few months, you should get more comfortable controlling your emotions by monitoring a mock portfolio on Yahoo! finance or Marketwatch.
Thanks for reading and until next time...


Mark said...

haha good post bro ... funny we were talking about that very same thing emotions about the market earlier ... ttyl

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