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What's the Hardest Part About Learning How to Invest?
Posted by: Tim Melvin (IP Logged)
Date: December 9, 2013 04:45PM
The hardest part about being a member of the value investing school in a rising market is sitting still.
When markets rise like they have this year the inventory pool shrinks pretty rapidly, and there is not a lot to do.
The few opportunities that exist can be bought and then it all becomes about sitting still and letting the value of your holdings become recognized by the market. Strong markets are a great time to catch up on your reading or indulge in some much needed recreation time. If you have done the buying part of the equation correctly and purchased shares at a significant discount to asset value, it becomes all about the waiting game.
The waiting game can be very difficult at times.
Look at some of the news headlines from around the web today. Carl Icahn is fighting with Apple (AAPL) over a buyback. Is Bitcoin the new gold? We will taper? When will we taper? Is China expanding or contracting? Wasn't that a great jobs report today? What's the dollar doing? Sears (SHLD) is spinning off Lands End. Is Facebook (FB) going to be a Dow stock someday? All the news flow and questions come at you at a rapid clip from the TV, the Internet and even the newspapers for those who still get their news and information via dead trees.
See also: Investors Need the Same Passion for Bargains in their Investment Portfolios
Then you have to face the siren song of the touts and bookies that surround the market. Try my simple system that will make you thousands a day with no effort. Get in on the next big thing. Buy gold to profit from the end of the world as we know it. Buy these penny stocks now to benefit from the coming wave of cold fusion. The Never Wrong Fund is up big this year. Better buy now. Our research department thinks this stock can moved from 20 to 22 over the next year.
That's 10 times the T-bill rate, so you should pick up a thousand shares today.
If all that's not enough you have all your friends and relatives adding to the pressure to do something. Your golfing buddy's uncle knows a guy who is a big shot at Goldman who told him that that Twitter (TWTR) is going to $1,000 and you should get in now. Everyone in the book club thinks this Tesla (TSLA) is a good stock because electric cars are really green and green is a good thing for the future.
See also: Why Value Aversion Can be Expensive
Your spouse wants to know how come you don't own Amazon in your IRA because you buy stuff there all the time. Your business partners met a guy whose kid made a fortune with something called candlestick charts and thinks maybe you should look into that stuff. The neighbor is trading options in his spare time at home after he's done with patients for the day and expects to retire soon from this endeavor.
It can be maddening.
It is enough to make you miss 2010 when no one wanted to talk about stocks and you were left in piece to accumulate little banks and REITs trading at half of book value. Even worse it can have you questioning your philosophy and process. Maybe you should see if you can use those candlestick cloud things to tell when cheap stocks are actually getting ready to move. That would sure improve performance. Maybe a little Amazon would be a good idea. After all you just did all your Christmas shopping online. Hey! I bet that's good for FedEx as well. It is very easy to get distracted and wander out of class at such times.
In the long run none of this stuff really matters very much at all and it takes discipline to ignore the temptations and occasional doubts.
In the world of investing there are only two questions that really matter. Is this stock cheap when you compare the stock price to the assets of the underlying corporation? When you look at the balance sheet is this stock safe. Do they have adequate resources to pay their bills and survive long enough to thrive again? Those are the only two questions that really matter to those of us in the deep value school of investing. Answering those two questions will render all the other questions and exciting offers pretty much irrelevant. The difficult part is ignoring the noise and all those well-meaning folks who don't get the basic businesslike concepts of value investing.
Tim Melvin is a value investor, money manager and writer. He has spent the last 27 years in the financial services and investment industry as a broker, adviser and portfolio manager. He has also written and lectured extensively on the markets with his work appearing on RealMoney.com, DailySpeculation.Com as well as several print publication including Active Trader and the Wall Street Digest. Learn which 3 low risk, high yield stocks Tim owns for the trade of the decade.
Stocks Discussed: TWTR, SHLD, AAPL, TSLA, FB,