I’m long overdue for
a new post.
This information is directed at folks of all ages, but most certainly
Millenials (Gen Y) and Gen X, who can benefit most from it. (Your greatest asset is “time” when it comes
to successful investing. And the sooner
you realize this and take advantage of it, the better. If you
save now, and invest wisely, you’ll reap significant rewards down the line.)
I’ve been investing for thirty years, since I graduated from
college. Well, actually, I’ve been
investing for twenty years. It turns out
I was gambling the first ten years, I just didn’t know it at the time.
What happened? Sometime around 1995, I read a book called The Warren Buffett Way. It took only a few hours for me to realize I
had been a complete idiot for the prior ten years. Nobody had ever taught me how to invest. I never took a course on investing. I simply read all of the personal finance
magazines and thought I was smart enough to invest. And, wow, was I wrong.
Prior to reading the book, I had dabbled in purchasing
stocks like so many other people have done for years (and many people unfortunately
still do.) With what little money I was
saving at the time, I purchased stocks based on articles I read in magazines,
or from listening to a “hot stock tip” from a friend, or even from something I
had heard on television. You know why
they call them “hot” stock tips? It’s
because if you buy the stock based on a “hot” tip, you’re likely to get burned.
Sure, sometimes stock
tips work out fine, but oftentimes it’s because you get very lucky due to timing,
and only infrequently is it due to a great company that appears out of nowhere
and becomes a huge success. Regardless, if
you buy socks on a whim, it’s no different than gambling. For
every one high flier, there are dozens, if not hundreds, of complete duds.
The point is, you should always be willing to invest
significant time in doing serious research and due diligence to ensure the
investment you’re considering is a legitimate one, with solid (and improving) cash
flow and earnings, respected brands, competitive barriers to entry and so much more. There are many, many more things to look for
than what I am listing here. I am only
pointing out that it takes hard work to find a company which has good long term
potential growth in its stock price, while having low risk.
I used to think that simply buying a company with a
reputable CEO at the helm was a smart move, but I learned the hard way that
it’s impossible to truly know someone.
Consider how Bernie Madoff fooled so many people (fortunately, I didn’t
invest with him.) Even if you do find a truly smart and talented CEO, you have no idea of knowing if he/she is going to stick
around. And it’s also possible that a
good CEO may simply be running an inferior business with little potential. Warren Buffett once said “Invest in a company that an idiot can run, because
one day one will”. I love that
quote.
If you’re not willing to invest the time to research a
company in order to understand the basis for the value in that stock and the
risk associated with it, then “don’t buy it.”
Another option is to find a financial advisor who has a solid track
record, who you trust, and who you have the confidence he/she is doing the extensive
research mentioned above. Your ultimate
goal is to buy stock in a great business at a fair price…not a fair business at
a great price.
How do you determine if the price of a stock is fair? You first need to read as much as possible
about investing. This blog post is not
meant to provide you with these tools. It
takes time to learn about investing, and it also requires real discipline. My goal is to only provide you with my past experience,
so you can hopefully learn from it and not make the same mistakes I did. If someone had provided me all of this
information ten years earlier, I’d be in much better shape financially. Regardless, with 20/20 hindsight, I can now
tell you to “invest the time before you invest a dime.”
Fast forward to today.
More people than ever before have abandoned the stock market
completely. This is very unfortunate. Over the long run, great companies with even
greater brands will generally do well. I
say “generally” because there are, obviously, no guarantees when it comes to
investing. However, if you take
investing seriously, like you should, then chances are good you’ll do fine over
time. Think about this; most people work
40 hours, or much more, every week to make an honest living, and then they only
spend minutes making investment decisions with those same dollars they worked
so hard to generate…and they risk losing those dollars so very easily. It’s
crazy, but it happens all of the time...and it doesn't have to be that way.
I have a few suggestions if you’re thinking of investing in
equities. First and foremost, read a few books about Warren Buffett’s investing philosophy before you buy another stock. Learn from him. Second, read The Intelligent Investor, by Ben
Graham. Third, don’t follow the herd. (Buffett says “be greedy when others are
fearful and fearful when others are greedy.”)
Think for yourself. And last, don’t get emotionally attached to a
stock.
Buffett’s investing acumen simply cannot be matched, in my
opinion. His record is bulletproof. Yes, he has a few pieces of shrapnel still
remaining in his bulletproof vest, but he has done well because he does his
best to avoid the landmines. The most
memorable thing I remember him saying is that he has done well not because he
has hit many grand slams, but rather, because he has avoided many
catastrophes.
You’ll learn a great deal about investing if you read his annual letters to his shareholders. If you read them all, over a few days, you’ll
be amazed at what you can learn.
You can see them here.
If I can save one person from experiencing the losses I experienced years ago, then this post will have accomplished its goal.
Happy investing.
