At the Berkshire Hathaway annual meeting this past week, Charlie Munger dismissed the idea that highly liquid capital markets have been a net benefit to capitalism. This assertion made Bill Mann think back to Warren Buffett's old challenge to investors: Make each transaction as if you only get to invest in 20 companies in your lifetime. Would your portfolio look different?
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Where this concept becomes beneficial is in the way that it creates a much higher awareness of the type of trading cost that many investors fail to value: opportunity cost. Whenever you are buying a stock, you are in essence making the following claim: "At this moment, I see no better place in the world for my money than this one." Your statement is the exact opposite when you sell. "I've searched all of my worldly possessions, and there is nothing that I think that is more disposable to me than this particular asset." That's what stocks are: assets. They're claims on the future earnings of the underlying company.
If you only get to make 20 decisions ever, that would make you value each and every transaction a heck of a lot more than otherwise, don't you think? So many investors still seem to take the "Fire, ready, aim" approach to deploying their own assets. Buy something because Joe from the gym mentioned it -- heck, it's going up! -- and endeavor to learn about the company later. Maybe. Put a sell-stop in just in case it drops, because that will protect you, right?
more...original document source at Financial Sense
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