What is Investing
While it may seem pointless and a waste of time to begin with this question, it is not. A clear understanding of the distinction between investing and trading strategies is paramount to successful investing.
Knowing how to make money in the stock market is easy: Buy low and sell high. Unfortunately, too often investors are trying to be traders. They are normal human beings who probably are inexperienced, lack knowledge and/or confidence. They end up buying late and selling late. In other words, they end up buying high and selling low. Of course, this doesn’t work.
Trading stock seems more interesting and exciting. Trading strategies involve fast paced decisions and moment to moment information. But few investors are close enough to the decisions or information to effectively execute these strategies. Consequently, they end up being late and miss the opportunities. Also, trading often requires one to react in a way which is adverse to human nature, to be out ahead of the crowd, sometimes with little on which to base the decision. People tend to want assurance and conformation. They wait until everyone agrees with them, and by then it is usually too late to profit by the decision. They act based on what others are doing or saying, and this makes them at the very least late, if not completely wrong.
“Ignoring price trends, technicals and sentiment is exactly what you’re doing” If I’m making investment decisions in a business, I’m clearly going to be looking at a different set of criteria than the chart. In the same way as if I was buying a property, I wouldn’t ask the owner to convince me by drawing lines on what the house was worth in the past.
Often, as an investor it may be necessary and practical to establish a position without accumulating a lot of information beforehand because the stock is moving. The successful investor will always follow through and do the homework, or at the very least get it done on their behalf.
You can buy a stock and not be investing in the company. In fact, it is not unusual for one to buy a stock and not be interested in investing in the company. Stock traders strategically have little interest in the company itself, but rather are concerned with the short term behavior of company’s stock price in the marketplace.
An investor is focused on the fundamentals of the company itself over the long term. An investor looks at the company’s past performance and its potential future performance. They both judge the company from its stock price performance, but from a different perspective. An investor is also interested in balance sheet, profit and loss statement, earnings, dividends, company plans, etc. Of course, one can be an investor and a trader at the same time, but usually not concerning the same stock at the same time.
As an investor it is wise to begin by determining a relative placement of any perspective investment within ones portfolio. Using what we call the “portfolio approach”, examine all of your financial assets and their relationship to each other, what the goal is for each, how it is to be measured, etc. Although there are numerous, and often expensive, formulas, software, systems and so, to help you in this, it is probably enough to use a simple method.
Divide you all your financial assets, including homes, cars, personal jewelry, together with stocks, bonds, funds, cash accounts, into the following three groups: safe, growth, risk. If you visualize these in a pyramid form with the safe assets at the base, the risk assets at the top, and the growth in the middle, you should begin to get a picture of yourself as a financial person. The amount of safe to growth to risk will depend on your age, goals, experience, etc. You should adjust these so they are relative to each other and suit your personal needs as circumstances change. However, keep in mind it is likely that you will need some of each group. Generally safe investments have limited return potential. For example, bank savings accounts are safe, but the return is low. Having a base of safe investments allows you to also have some risk investments where the potential returns are greater. This can make up for the low returns on the safe investments. In other words, your portfolio assets should be working together.