Why You’re Failing At Investing
Often times individual investors fail because they are taking published and widespread knowledge and advice. What I mean by this is simple, once the next hot thing in investing (metric, technique, ratio) is published and everyone knows about it, it’s too late to take advantage of that technique. As an investor if you follow the crowd (and you are always late to the party) you are going to get repeatedly burned. What happens to these investors is they are buying when everyone is getting ready to cash out their profits. This answers why you’re failing at investing, but this post aims to help you correct your investing strategy and become a successful investor.
Investing is tough! It takes guts, wits, and a willingness to persevere when everything seems to be going against you. As an individual investor the cards are inevitably stacked against you. You’re the last person to hear breaking news, you have the least amount of resources at your disposal, and it’s not your only focus in life (many individual investors also have day jobs and are saving for retirement).
However, with all the disadvantages mentioned above, you still have odds in your favor to watch your money grow over your lifespan. The problem is most people treat investing as they would gambling. If you are not in it for the long haul then you might as well take your money to the craps table every weekend and lose it there. At least you’ll get free drinks while you are throwing away your money. If you want to be successful as an investor its going to take a lot of work and you are going to have to change the way you think.
How To Start Succeeding As An Investor
If you have been following my blogs for the last few months you know by know that I have preached consistently week to week about knowing what your investing in. This means more then knowing what type of products they are making, what industry they are in, and where they operate. When you invest your money into a business you need to know that you are purchasing something that is worthy of your hard earned dollars. You need to start thinking about stocks like everyday products. When you go to the supermarket for instance you have several brands to chose from for any particular product. When you are making the decision to purchase cereal (for instance) you have to weigh a few options.
In this example you might look at the 3 types of chocolate flavored cereals. Lets say to are puffed wheat and the third is puffed rice. As you weigh your options you take into consideration a few different pieces of information. You will probably be looking at price, quality, and flavor. To compare this to investing, you may be looking at three companies in the same industry and be comparing the price per share, the quality of their management team and the effectiveness of their production processes.
So after looking at everything you have generic brand chocolate puffed rice and generic brand chocolate puffed wheat cereal that is the same price. The third name brand chocolate wheat cereal sells for double the price of the other cereals. The name brand cereal is healthier for you and you like the way it tastes a little better then the others, but it is so pricey when it is not on sale. You decide you are going to look closer at the two generic cereals this week instead. Now you have to choose between puffed rice or puffed wheat. Since everything else is nearly identical you have the only choice you have left to make is the type of cereal your prefer.
Bringing this back to business, there are often many possible investments in a particular industry for you to choose from. Often times you will have businesses that are obviously much better off, but they are just to expensive for you to afford at this time, or they are just priced extremely high (P/E ratio) compared to other similar companies in their industry. The point is when you are choosing stocks it is no different then when you are shopping you have to take all the best information available to you to make the best decision.
Ways to Make Your Next Investment Successful
Going back to the statement I made in the beginning of this post about following the crowd and once everyone knows about a technique its too late for you to take advantage of it. Instead of focusing on gimmick metrics and techniques the best way to become a successful investor is to do your homework. I have previously written a few resources on how to accurately measure and analyze a stock. These techniques include:
• Value Investing
• Analyzing Company Management
• Analyzing Financial Statements
- Analyzing The Statement of Cash Flows
- Analyzing The Balance Sheet
- Analyzing The Income Statement
Value Investing
I have previously written a post on value investing in the past and how you can use the principals of value investing to analyze a company. Some people don’t like value investing, and there are many different techniques for everyone to use. However, the overall principals of value investing can apply to many different investment techniques. The underlying theme of value investing is know what you are investing in. Since businesses are a lot more complicated then cereal, there is much more to measure and understand. What value investing helps you do is take all these complicated parts and make them into easily digestible chunks of data that you can compare against competitors and use to make the same educated decision that you make when purchasing cereal.
Analyzing Management
Originally, value investing lacked any measure of a company’s management team. It was a major flaw, because managers make and break a business. On this post I discuss techniques you can use to evaluate the managers of a business.
Financial Statements
These are often the first thing an investor looks at. The problem is, most individual investors (and some institutional investors) do not truly understand and digest the information they are seeing on a company’s financial statements. This post on Understanding financial statements helps you understand what exactly each piece of information presented on these statements actually means to the business. For a more detailed description look at my posts that specifically cover the income statement, balance sheet, and statement of cash flows.
Succeeding At Investing
As I stated, as an individual investor you have to put in the hard work. You are always going to be the last person to hear about major news releases so if you trade based on breaking news you’re always going to behind institutional investors. If you are trading based on new strategies you are always going to behind the crowd as well. What you can do as an individual investor is put in some elbow grease, and really understand what you are investing in. Instead of being the investor that other investors make their money off of you can put yourself in the driver seat, be ahead of the curve and be the one who is taking advantage of investors that are still trading on breaking news and gimmick techniques and tricks.
Above I gave you several resources to use to accurately value a business and use that to make an informed investment decision. Most of the times the way the best investors make money is by taking advantage of a market place that is based on hype and bubbles. They are able to consistently generate high returns because the are selling when everyone else is buying and they are buying when everyone else is selling. The way they are able to get themselves into this position is because they know through research that the market has overreacted to a particular business and the price does not acculturate reflect the true value of the business. This happens all the time and there are ALWAYS companies who are overvalued or undervalued on the market. Your job as an individual investor is to find that name brand cereal on sale or that (currently generic cereal) that has an awesome product, great management and great production processes. This is how you will find those gems in the penny stock world and become a successful investor.
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