A Few Basic Keys

To quote Mark Twain, as he ruminated over the great stock market crash of 1929, October is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August, and February. He was without a doubt an intelligent wit, an insightful observer, and most certainly a cynic but he had a point, investing in the stock market, for some, may not be a good idea. However, if you are going to ignore Mark’s advise and invest, there are some basic keys to remember.

Before you start, you need to be able to answer the question as to why you want to invest in the stock market in the first place. It sounds almost trite to have to ask it but it’s necessary, if you can’t answer it you should probably put your money elsewhere. It’s probably also worth determining what kind of investor you want to be, an adventurous one or a conservative one. Being an adventurous investor is fine, it can deliver rich rewards and with it much admiration but it comes with it’s own risks, risks that should be self evident.

Within this discussion, there are a few keys worthwhile keeping in mind. The first one is this, there is no hurry to invest in the stock market, just as there are always many traps, there are, equally, always opportunities. So if someone tells you that you have to immediately jump on a stock because it’s going to go through the roof then you’re probably best to quietly walk away. Bear in mind the words of Warren Buffet, Chair of Berkshire Hathaway, he is one of wealthiest men and most successful stock market investors in the world, who, by the way, still drives a second hand Volvo, who said that wealth is transferred from the impatient to the patient.

Part of the trick, or, if you like, the skill, in successful investing is knowing what not to invest in as much as knowing what to invest in. My dear Dad, who was a smart man indeed, liked to have, on most Saturdays, a bet on the horses. I still recall the picture of his sitting at the dining room table on a Saturday morning, over a cup of tea, before heading off to his surgery, ruling a line through the races that he was not interested in. He understood which races to not even bother worrying about. He also knew when to stop, smart man my Dad, he was a rarity, a successful punter. It’s also true of investing, one must determine which industries, or sectors, or businesses one is not bothered with. I also like to invest in companies that I like the idea of, if you like, the culture of it, that I am an owner of a fundamentally good business and not one that just delivers me a result. I’m not naive enough to think that an ASX listed company is a philanthropic organisation solely devoted to the public good, they are all, without exception, amoral, if not immoral, constructions designed to maximise profit. Nevertheless, I do my best to assign a certain degree of morality to my deliberations.

The second basic key is that if a stock price looks too good to be true it probably is. The number of times I’ve seen punters, and that’s what they are, jump on a stock because it was cheap only to discover that the stock was cheap for a reason, has made me realise that in some instances the idea of going out to the track and putting my hard earned on number eight in the last has rather more appeal. Better still, just use the money you’d have lost anyway and take the one you love out for dinner, or book a nice holiday.

The third key is a difficult one to learn. It’s a lesson we should all have learned from our mother when we were young and then held on tightly to into our adulthood. When she smacked our hand when we went for the extra dessert and said “don’t be greedy,” she was also referring, without knowing so, to investing in the stock market. The corollary of that is that, should you find yourself in the fortunate position of seeing a stock you own increasing in price, setting aside it’s dividend, to a point where you are tempted to add an extra zero to your net worth, you should pause and realise that the stock is only worth anything at all when and if you sell it. If you’re not prepared to sell the stock, it’s worth nothing. Paper value is not value at all, it’s assumption.

Just recently a friend of mine bemoaned to me the day he didn’t buy a particular stock, which at the time was a mere nine cents, as he watched it go to fifteen cents almost the next day. I told him that to make a quick profit from the stock, something he was clearly after, he’d have to had sold the stock straight away at fifteen cents. I opined that he could not guarantee that he’d have been able to bring himself to do just that, he may very well have, feeling a little greedy, held on for a little longer, which, to my cost, I have done, anticipating an even bigger return, only to find the same stock tumble in price two days later, leaving him angry and frustrated that he didn’t sell at fifteen cents, a practice referred to as day trading, not investing. Or, put another way, the safest way to double your money is to fold it in half and put it in your pocket.

Which brings me to the next key. You have to have a plan, which includes an exit strategy, a limit to which you are prepared to stretch before hastening a dignified retreat. Having said that, having this strategy is not absolutely necessary for every stock you own. If you’re prepared to hold on indefinitely to a stock you must also be prepared to lose everything, which of course has it’s own virtues but I wouldn’t recommend that across the board, that would just be a needless rhetorical flourish or perhaps a type of post-modern financial insanity. This strategy also includes a conviction that should you sell for a profit only to see the price continue to rise you can’t complain, you’ve still made a profit. For that you should give thanks and quietly celebrate.

Anyway, happy investing.

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