The universal mantra for armchair equity investors is: “Buy low, sell high.” This notion refers to the idea that you should purchase all of your stocks at the lowest possible price. The low, at the very moment of your purchase, will then begin to rise. You accumulate gains “on paper” until the magic moment when you have accumulated enough wisdom to determine the high. The high meaning the instant when the stock will decrease a moderate to substantial amount heading to a moment when you will “on paper” lose money. And then it happens, you make your trade thus converting your fictional gains into actual gains. You are a stock market wizard. There are few flaws in this investment philosophy. You buy at the lowest possible price and sell at the highest possible price, thus capitalizing on the greatest gain. You continually do this until you’ve amassed a wealth enabling you to trot out to pasture near the sands of Florida. Really, what is so hard about capitalism and amassing a fortune?
The elusive “they” say it is harder to keep a fortune than it is to amass one. Unfortunately, “they” have missed a few steps and declined to incorporate reality into the mantra “buy low, sell high.” You should be aware of the continual march of badly informed financial lemmings taking Hallmark advice all the way to unfulfilled financial dreams. There are a few ideas to keep in mind if your goals as an investor are to own your financial future and make investments yourself or simply to have a more robust understanding of what your financial advisor is up to when he sends you an update.
1. What were your plans for today? Did everything happen today exactly how you planned? If you answered yes, then congratulations. More than likely, however, you answered no. (If you aren’t a planner more than likely this article is not for you because you probably aren’t thinking about your financial future) The point about planning, however, raises an interesting human dilemma. No human being or cooperation of human beings exhaustively knows the future. Collectively we can predict the future from time to time on juvenile, insignificant matters. When we’re talking about finance those things don’t matter as much. When you’re investing your hard earned money you demand accuracy. You want to know the future. You NEED to know the future. But you can’t. So what is the solution? There isn’t one, so post on Facebook if you find out. This is the number one lesson of investing. The future is uncertain no matter how certain the legion of hype seems to be at the moment.
2. The price of a stock is a great mystery and one of the most debated dualities in all of the world. Is the price of a stock based on the inherit value of the on-going business? Or, is the price based purely on propaganda and speculation? The answer is yes. You could cite countless examples for both propositions until you are blue in the face. And both parties would be correct in a sense. By saying the answer is yes, you as an investor can navigate the market by finding instances to exploit both circumstances. (see #4 for an explanation)
3. Since you cannot know the future, it is completely impossible to know whether a stock is at a high (it is possible to know a low, obviously, because the price of a stock cannot fall below $0 in theory—but you can owe more than you invested depending on your strategy). Due to this impossibility you can always miss an opportunity to make “more money” and to lose “less money.” But is this really a problem? Not necessarily, depending on your goals and time horizon as an investor.
4. Given #2, one of the principal philosophies of finance is the approach known as value investing. As a value investor your goal is to find under priced stocks that are being undervalued compared to their worth as a business. When you can determine a stock in the scope of a value investing trade you can make money if given enough time. In these scenarios, it is in your favor to have a stock carried up the wave of propaganda relating to their business prospects. As long as you have entered the trade at a point when it is undervalued, you can wait until a stock has reached a price when it is overvalued and sell it to capture any gains you have made. Value investing is a skill and, frankly, a lifestyle. As a passion or hobby it can be consuming so it is of the advice of the author to leave value investing to the professionals. You can, however, understand value investing without actually practicing it.
5. I am investing because _______ . If you can’t fill in the blank then you are wasting your time and most likely your money. Please fill in the blank. In order to succeed (or even be competent these days) in any endeavor you have to practice continually and in order to practice continually you’ll need a substantial motivation (the blank). The blank is a completely subjective decision based on your own value system. The author cannot make any suggestions for you.
6. Most likely your investment strategy has an end game in sight. Whether your end is a specific dollar figure to live off after retirement or to leave as an inheritance. Or the dollar figure could be a goal, like the 4:00 minute mile. Whether you are investing for competitive or practical reasons you’ll need a specific time horizon and goal. Otherwise you should probably invest in soap because you will take countless baths over the years.
7. When you think of the future (in an abstract way, not a specific way like in #1) do you see smiles and rainbows or do you see storm clouds and the Patriots winning the Super Bowl? However you answered the question you will most likely fall into one of two categories: optimist or pessimist. Neither is necessarily better or worse than the other. You can make and lose massive amounts of money with either attitude. The important distinction to make is to understand your mindset. When you can understand your subjective outlook then it is possible to question yourself and introduce other ideas into your thought life so you don’t become a victim of your disposition.
8. There are an endless amount of financial pundits on television and internet today. Whenever you read this article, comically, I’ve just introduced you to one more. You can literally search Google and find vindication for any theory you may have. If you only read or hear exactly what you want to hear you’re always going to think you’re right. This mindset can be bliss but it won’t help you be a better investor. The more information that is introduced into the financial market hasn’t necessarily introduced more diversity of thought. More information has led to a great pack of lemmings marching to the edge of the cliff. Most likely whatever you read on the front page of the Wall Street Journal, Yahoo! News, or CNBC was also read by millions of other people. How can this help you? Well, it can’t really help you. Please understand that you are a unique person with unique insights. Experts can describe situations and offer insights into the “why?” questions but they do not make perfect predictions. Again, going back to #1, experts continually get future financial conditions wrong and offer junk advice. Your best bet as an investor is to read as much as you can and synthesize it IN YOUR OWN MIND. Whatever conclusion you come to will be completely unique. It is of the opinion of the author that this will be your best advantage.
9. “They” also are known to offer a saying “have one’s cake and eat it too.” Essentially saying you can have the best of both worlds. When applied to finance this is purely a strategy. As a modern consumer, most likely, you are familiar with hundreds or even thousands of products. With a simple search on Google you can find out who makes every product on your shopping list. The strategy here is to invest in what you know. In no way is this an original idea. This strategy has been around for years. The theory goes that if you use a product continually you probably know if it is quality or not. You also know when changes have been made. This gives you an edge into the future of the business behind the product. Applying this further, it also helps warn against investments of things we may not understand. A rule of thumb is that if you don’t understand the business you probably shouldn’t invest in it. Warren Buffett uses this idea and most value investors will tell you the same thing. So if it has worked for them it will probably work for you too. You can politely decline the next time you hear an esoteric “trust me it will work out well” pitch on a business you have no hope in understanding. And maybe alert the FBI because it could be a Ponzi Scheme.
10. Finally, and most importantly, Wall Street investors who infamously work 100 hour weeks can’t make perfect investment decisions. Wall Street firms have famously been collecting employees with PhD’s in spectacular fields like Theoretical Physics and countless Ivy League graduates, among others. These firms rival the finest scientific institutions in terms of intelligence. And they can’t even get it right! Wall Street loses money in a bear market and makes money in a bull market just like the average E*trade investor. Given this unfortunate reality, popular media (in order to keep the money flowing) will trot out specific cases of those who have gone against the grain and made money in times when everyone else was losing money. But this is fool’s gold. These are tales of people doing things in the past. The future financial market and set of circumstances surrounding the global economy changes virtually daily. So any strategy utilized by financial wizard A from 2011 is almost completely useless in 2012. The only insight that is useful is the renegade investor most likely came up with his own strategy, employed it, stuck with it, and ignored what everyone else was saying. Like #8, your best advantage is your unique mindset and knowledge. Obviously you can still fail fantastically with this approach but you can also succeed. The real understanding in this point comes from the satisfaction and peace knowing no matter how much knowledge you acquire it is almost useless when it comes to accurately predicting the future. But with enough information, a proper strategy and understanding of your own strengths and biases, you can have a punchers chance in the financial battle.
The modern day individual and family has an enormous amount of pressure to succeed financially. Simply to live within your means can sometimes be a significant financial burden. Adult responsibilities can be overwhelming, but with a few helpful financial realizations they can seem like less of a weight on your shoulders. By reading and thinking about some of the above points, you can be a better equipped investor. If you go into the equity investing battle with only “Buy low, sell high” as your approach and a few Jim Cramer episodes for information you will surely feel unprepared.
It is not so easy a baby can do it.