How Investing is Like Dog Training

Those of you who know me pretty well know that I am a dog lover.  Those of you who know me very well know that I compete at the highest levels of dog training.  My girl, Aspen, has earned 89 Obedience Trial Championship (OTCh) points.  One hundred OTCh points are required for a dog to achieve the OTCh title.  The OTCh , a title granted by the American Kennel Club, is a very exclusive and special title.  Only about 100 dogs per year earn this title. 

Moreover, Aspen has also been invited to the National Obedience Invitational this December.  This dog show is, as the name suggests, an “invitation only” affair.  Only dogs who have met certain very high standards are eligible to be invited to this very prestigious event.

This week, I would like to discuss how training dogs to compete at the highest levels of obedience is similar to investing in the stock market.

In dog training, attention to detail can mean the difference between winning and losing.  The same is true of investing in the stock market.  Likewise, it takes a lot of time and devotion to detail to ensure that I am investing my clients’ money in the very best stocks that are offered for sale.  Importantly, all decisions regarding what I buy and sell for each of my clients are made by me, after a careful review of a company’s financial statements in comparison to where a company’s stock is currently priced.

When I decide to buy a stock, I have personally reviewed the all research reports, issued by brokerage firms, to which I have access.  But that is just the beginning of my assessment.  Having a Certified Public Accountant (CPA) license, and having worked as a financial statement auditor at one of the “Big 8” accounting firms in the mid-1980’s, in my view, gives me an extra level of expertise that other investment advisors (and brokers) do not have.

I also personally review the company’s most recent financial reports, including the Annual Report and 10(K), which is a report that is similar to the company’s annual report, but is mandated by the Securities and Exchange Commission and at times offers additional information than that which is included in the Annual Report.  Depending on the time of the year, I may also review the company’s quarterly statements and 10(Q) reports (which include information for 3-month time periods, but otherwise are similar to the company’s Annual Report and 10(k)).

I will then decide whether or not the company’s stock, based on the information contained in the financial statements, is worth buying at its current price. 

Why does this matter?  A great company may be in a position in which its common stock is overvalued and therefore is not worth buying.  In these cases, I keep my eye on the stock and will buy it when there is a general market decline, and all stocks are cheap.  In this scenario, the stock is undervalued, yet it is a wonderful company worthy of investing my client’s money in.

There are also situations in which a whole economic sector of the market it sold, and other sectors of the market are purchased.  For example, if there are fears of recession, economically-sensitive stocks, in industries such as Chemicals, Papers, Metals and Mining, Energy, Consumer Durables (autos, homes) suffer.  This can create a buying opportunity.

So-called “defensive” stocks, such as Consumer Staples (Wal-Mart, Procter & Gamble) and Utilities (Duke Energy) will perform relatively well during periods in which investors fear that the economy will decline, as investors sell stocks that are sensitive to economic weakness and buy stocks of companies that sell goods and services that are required regardless of the economy’s strength.

In the case of a mediocre or poorly-run company, sometimes, there is an opportunity for improving the management of the company.  Normally, I try to avoid mediocre or poorly-run companies, but if there is an opportunity to buy such a company at a compelling price, I might take the plunge.

Generally, I like to invest in companies that are high quality and can be held for long periods of time.  These companies do well year after year, and slowly, but steadily, will make my clients money, as well as provide dividend income (and dividend increases) that my clients are normally seeking.

Another way in which dog training and investing are similar is that sometimes, our results depend on what other people do.  When you are trying to earn an OTCh on your dog, you do the very best that you can with your dog.  You and your dog are a team, and you cover for each other if one of you might not be working up to their highest level.  There have been times that I have covered for my dog, and there have been times that Aspen has covered for my poor handling.

There are also the other dog and handler teams to consider.  Sometimes, other dog and handler teams just perform better than you and your dog.  In all cases, you and your dog do your best, and where you end up in the placements ultimately depends on how other teams perform.

The same is true as far as investing in stocks.  As a professional investor, I may have done the best research possible and selected the best companies possible in which to invest.  But this quarter, or even this year, other stock market investors, collectively, might have a different opinion.  This may lead to a situation in which an individual stock, or a client portfolio that includes many stocks, might not do as well as “the market” during the period during which investment performance is being measured.

But unlike a dog show, there is not a sure “end” to the measurement period.  Instead, there may be a time during which a client’s investment performance does not measure up to the performance of a stock market index, such as the Standard & Poor’s 500.  In these cases, it is important to understand that this measurement period is not the end.  Ultimately, this may be a temporary situation, and with time, the superiority of the client’s investments portfolio will be obvious.

On a final note, I mentioned the word “team” as it relates to a dog and their owner/handler.  I see investing for my clients as a team effort.  Unless a client communicates to me their true investment objectives, it is impossible for me to put together an investment plan that will meet their objectives.  Being a team requires a level of trust in which we can communicate what must be communicated in order to get the job done.  The same is true with dog training, especially when a dog and handler team is at a dog show and winning or losing is on the line.  And when the client’s future financial security is on the line, trust and an open line of communication is everything.