by Mark Lamendola, MBA
I began investing many, many years ago. I remember my first loss. It was on Chrysler
stock, in the late 1960s, early 1970s.
In the early 1980s, I took the Hume Investment course, opened an account with E.F.
Hutton, and began investing with a vengeance. I had very few losses, and many good triumphs over the next 15 years. I used investing to tide me over long periods with no other income, to pay for house downpayments, and to live beyond what I could earn on a
salary. My investment career took a major hit in 1998, when I got nailed with a series of
catastrophic losses--enough to buy a house in cash.
So, now that I have paid my "tuition," let me pass some tips to you.
- Always determine your investment goals, first. If you are many years away from a fixed
income, your goal is to grow wealth.
- Bonds are a poor investment for growth.
- Margin accounts are excellent for buying stock you can't afford. Even if it's very good
stock, as mine was before a margin call wiped out the bulk of my savings, and even if you
are at a conservative margin amount, as I was before my tragedy, always have a way to pay
off a margin loan immediately.
- You should probably not buy individual stocks unless you have at least $50k to invest.
That way, you can build a diversified portfolio of stocks on which you can write options.
These options are the only kind of money that seems to grow on a tree. Always buy a stock
for its quality first, its option ability third. Oh, and make stock quality second, as
well.
- For the typical investor, buying a mutual fund that scores well in the different ratings
systems put out by such investment journals and magazines as The Wall Street Journal,
Kiplinger's, U.S. News & World Report, etc, is the best move you are going to make.
- Do not diversify among funds of the same type. This is silly. Instead, you might invest
70% into a large cap growth, 10% into a mid cap growth, 10% into a small cap growth, and
10% into an international fund. If I were retired, I would invest 75% into a large cap
fund, 10% into a small cap fund, and 15% into a bond fund. The bond fund would allow me
access to cash in most major market downturns (but not all). Bonds do not create wealth;
they only transfer it. Therefore, the rate of return is always far lower than for equity
investments. But, bonds tend to be less risky and they are good for people on fixed income
and no way to make more money--consider them insurance only.
- Never follow the advice of a broker. Follow your own investment plan and your own
research, instead. A broker made me money once. My big fall came when I let a broker talk
me into deviating from plan--and then letting him guide me through the crisis. Had I
followed my plan, the crisis would not have happened. And had I performed any of the
several steps he talked me out of performing over the three days following the start of
the crisis, I would be a much wealthier man today.
- Just remember, if your broker is so good, why is s/he still battling the subway and/or
traffic to go to an office every day? Hmm?
- Be patient. Don't expect your investing in equities to increase your wealth at a steady
rate. Time is your ally.Make changes to your investing strategy only after careful
consideration and never very often.
- Read investment magazines and papers. Subscribe to them. Look for opportunities, then
study them. However, do not grab onto opportunities that don't fit your investment
strategies or knowledge. If, for example, you don't understand techology, then avoid
technology stocks and funds.
More thoughts in investing
The original concept of investing involved buying part ownership
in an ongoing business or in a specific venture. You would then
become invested in that enterprise. You didn't look at daily returns
or even monthly returns. You backed what you believed would be a
winner. And a winner did or made something that other people were
willing to pay for.
Today, what people call "investing" is more akin to gambling.
They buy shares in a company based not on what that company does and
the market it's in, but based on such specious things as its stock
price or its earnings per share.
The earnings per share metric was, at one time, a useful tool in
the overall evaluation of whether a company's share price was too
high. Today, it's just about useless. Two reasons why:
- During the DotCom boom of the early 2000s, companies were
selling at outrageous EPS ratios. The EPS factor today retains
much of that speculative personality.
- A company can state its earnings just about any way it wants
to; there is no standardization. "Earnings" is a fiction.
Relatively few people possess the formal business training
required to accurately assess a business before buying into it. This
isn't a show-stopper, however. Average folks without any business
training often put up significant sums of money because they believe
in the person running the business. They may even do this as a
group, with the group then providing oversight as the board of the
company. This was one of the hallmarks of Chinatowns across the USA
for many decades.
So if you want to invest, what are your options? Here are some:
- Individual stocks in individual companies. Generally not a
good idea, because it takes quite a bit of money to have any
sort of stake in a company. So you will be putting your eggs in
very few baskets unless you are already very wealthy.
- Stock mutual funds. This will produce moderate returns,
generally. Some funds are much better than others. To do this
correctly so that your increase in fund value outpaces inflation
(and I mean actual inflation, not the phony numbers published by
the federal govt), you will need to study mutual funds for at
least a year (assuming a fairly rigorous schedule). Not just
read about returns, but study. You'll need to understand what
various fund managers think. Or, you can ask someone who seems
to understand and hope that person's right.
- Bonds. Guaranteed loss of buying power. They don't keep up
with inflation. Do not buy.
- Board seat investing. You can buy a seat on the board of a
small business. If you know a competent individual whose
business is growing and profitable, this may be a great way to
go. But determine why this person would be amenable to selling
shares in the business. What's the reason for raising the money?
- Your own business. Something like 95% of new businesses fail
within their first year. So if you're going to start your own
business, invest a year in obtaining some business savvy. Take
some basic business administration courses; an accounting course
is essential. Read one business book every 2 to 3 weeks, but
skip the trendy stuff. You want basic business savvy. Then,
visit businesses similar to your own and see what they are
doing. Finally, set up an advisory board; make sure the people
on it are qualified and not there just because you like them.
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