Friday, October 20th, 2017

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Evaluating Investments: Part 1

Seen the headlines? The hi-tech economy is way, way up! Er… down. Ahh… up. Uhrm… down again. And have you noticed that “old economy” industrial stocks are stagnant now? Oops, that was last week. In fact they’re rising sharply.

Confused? You should be! This is the information age: way too much information, mostly of the wrong kind. Hey, with a web-enabled cell phone by the bed and a waterproof fax machine in the shower, you can ruin your financial life before even going down to breakfast.

Every day, it seems, you read an article or see an advertisement that’s designed to persuade you of something dangerously false: that, just by having the very latest information, and acting on it five minutes ago, you can ride the next wave all the way to instant wealth. It’s a message that sells. In the wake of the great 1990s bull market, many Americans believe that all investment news is good news. A few too many of us have seen the 22-year-old day trader driving by in the brand new Porsche with “dot com” vanity plates. A few too many of us have thought: “That could be me.”

For the sake of your money, let’s take a really large bucket of water, stir in some ice, and pour it all over the instant wealth dream. Now maybe we’re awake enough to think straight.

The truth is, there are really two kinds of successful investor: the hands-on professional who tries to time the market, and the hands-off non-professional who would be crazy to try.

The Porsche pilot is just a modern take on a more common and more traditional type; the professional with an advanced degree in finance or statistics and a well-upholstered job at a major investment house. Professionals “time the market” using deep technical knowledge of one or two industries or sectors, and their investments are relatively short-term bets about the way those parts of the market will move. You can try it, if you must, but please understand that your chances of winning this game, consistently over time, are right up there with roulette. Russian roulette.

ShareBuilder is for the second type of investor – the other 99% – it is investing in an entirely different way. Instead of trying to profit from short-term market trends, we try to make smart choices, and then stick with those choices. We forget about “timing the market.” We stop our ears when talk turns to the latest investing craze. We plan to grow our money by investing in solid companies. That means: investments that may sometimes seem to be doing badly (because all investments sometimes seem to be doing badly) but which we believe to be sources of reliable long-term growth. And when we say “long-term,” we think in years, even decades.

We long-term investors are inoculating ourselves against the disease that eats away at even the most professional “market timers.” Never do we buy something because it’s “hot” (at a point when, precisely because it’s hot, it’s already overpriced). Never do we compound the error by selling it three months later when it’s “passé” (at a point when, precisely because it’s passé, it’s already lost much of its value).

“Stick with your choices” is easy in theory, hard in practice. And the picture is complicated by the fact that some good choices really do turn bad and really should be off-loaded. Suppose you had invested in typewriters in the 1960s. By the mid-1980s, that was an investment to get the heck out of – even if you had already lost a lot of money on it. But selling at a loss should be a last-resort strategy. What you need to avoid is selling because of a temporary “paper” loss, even when that loss is irrelevant to the soundness of your long-term pick (click here to read more about Virtues of the Long Term Outlook ).

And so to the first part of the ShareBuilder philosophy – just precisely how do you make smart investment choices in the first place? Time to read Part 2 of this article.

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