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Explain Your Picks

 

 

Rule 24

One of the worst things that ever happened to stock picking was the Internet, because it took away one of the most important brakes on the process, one of the most important warning systems, which is talking to someone about a buy. Now you can, with a stroke of a key, buy the stock of Sirius (SIRI - news) or Avaya (AV - news) without ever having to explain to another human being why you are doing so. This is why you should always:

 

Be able to explain your stock picks to someone else.

 

Buying stocks is a solitary event — too solitary. As I love to say, we all are prone to making mistakes, sometimes big ones. One way to cut down on these mistakes is to force yourself to articulate to someone else why you like Elan (ELN - news) or why you think Biogen Idec (BIIB - news) is a winner.

When I was at my hedge fund, I always made every portfolio manager sell me the stock, literally sell it to me like a salesperson, before I would buy it. If you are in a position where you are picking stocks yourself, get someone to listen to you and let you articulate your reasoning.

Recently, one of my email correspondents said that her daughter bought the stock of Sony (SNE - news) because of the Xbox. Ouch! That would be Microsoft (MSFT - news) that makes the Xbox. A mistake like that would have been picked up by most people who articulated their reasoning to others. The simple selling of the idea first, to someone else, can help you spot flaws.

I also like to ask people, "What's going to make this EMC (EMC - news) go up, what's the catalyst?" Or, "Have we missed the move in this EnCana (ECA - news) already?" And, "What's your edge?" These are among the questions I ask. If you can't answer, you shouldn't be buying.