Nine Market Lessons from John Dorfman

John Dorfman has written a stock market column on Bloomberg for about nine years, and recently announced he will be leaving to spend more time at Thunderstorm Capital, an investment firm he founded in 1999.

His columns have been good over the years, and his investment style has a decided value (wikipedia.com) tilt to it. I was particularly excited to read his final piece when I saw the title: "Nine Lessons I Learned in the Past Nine Years." I think it's worthwhile for any potential investor to review these lessons, and to look up some of his older columns. They make for some good reading.

His nine lessons were (and I quote):

"1. Out-of-favor stocks are the best road to capital gains.
2. Don't be swayed by what Wall Street analysts say.
3. High portfolio turnover is not necessary for good results.
4. The investment value of a stock is independent of whether it has been moving up or down.
5. Predicting the market with consistency is extremely difficult.
6. Predicting the economy is probably even harder.
7. High valuations alone aren't a good reason to sell a stock short.
8. High profits alone are no reason to invest in a stock.
9. Dialog with readers was one of the best parts of my experience as a columnist."

Number four on the list jumped out at me the most. Time and time again, I have seen people buy a stock, watch it go up 10%, then tell the entire world about what a great investment they made. They might not know a thing about the company or its prospects, but they feel validated that the stock went up 10% in the week or month since they purchased it. If it goes down 10% the next week or month, all of a sudden it is a bad investment and they look for someone to blame for recommending them such a lousy stock.

For most of us, a long-term investment strategy is most appropriate and over the long term, the returns you get from a common stock investment will reflect the true value of the underlying company. In the short run, a stock can run up 10% because of a mention on Cramer's Mad Money, or fall 10% because of a fire at a warehouse. These are the kinds of price movements that in most cases have nothing to do with the true value of the company, yet will cause many people to buy or sell a stock in panic.

As Warren Buffett often says "in the short run, the market is a voting machine, in the long run it is a weighing machine." If you choose to go the road of investing in individual stocks, you would be well served to keep Dorfman's nine lessons in mind.