When it comes to money and investing, doing it the right way is essential. Now, one person’s "right way" may not fit another’s, but every investor needs a game plan.
So let me offer some rules that apply whether you are a value investor, a growth investor, an active trader or just someone who believes in capitalism and wants a shot at building a retirement portfolio or a stash for the kid’s college fund.
First and always:
Think before you dig into your pocket. Do your homework. Read, read and read. Don’t rush into any investment, no matter how good it may sound or how many friends have already committed funds to it. Without exception, every investment has pros and cons. Know what they are.
Know what you are buying. Peter Lynch, the legendary mutual fund advisor, once said that he never put money in a company producing a product or service that he didn’t understand. He learned that from Warren Buffet. Both men have done quite well for themselves and investors.
This doesn’t mean that, like Buffet, you should avoid anything that is "technology" oriented. It does mean that you should attempt to learn as much as you can about software, hardware, the Internet and related issues.
And don’t accept somebody’s 30-second explanation of a fancy piece of software that took years to develop. Study everything you can on the company and its products – before you invest.
Don’t be afraid to go against the grain. If all your friends are excited about a particular investment, you might also consider buying it – but do your homework first. If it turns out that each person bought because another recommended it, you might want to consider the motivations of the original source.
Monitor your investments regularly. You don’t need to rush home every evening and punch up your stocks or funds on Yahoo! or America Online. But you should carefully monitor each investment in your portfolio. We have all heard the adage the squeaky wheel gets the oil. Investments that do not perform in line with your expectations should get immediate attention.
Don’t be afraid to admit you made a mistake. If you invest in a stock and it goes the wrong way, don’t be swayed into throwing more money after it. Don’t feel that every investment you make must turn out to be a winner. Cutting your losses early on may save you more in the long run. Consider using stop orders at a predetermined price to limit losses and protect profits. This does wonders to reduce the emotional involvement in the often-difficult decision to sell.
Don’t be afraid to put money into an investment that has experienced a major price decline. But do so only after careful research and only after you have found an investment thesis that makes sense to you. Keep in mind that many investments get beaten up for good reason.
Take all research and chatter about a stock with many grains of salt. That goes for what analysts are saying and for what you may read on a stock chat room. But do read everything you can and learn to synthesize it all. Eventually, you will learn to cut through all the clutter and you will make better decisions more often.
And finally, ask questions – all the time. Never stop pursuing knowledge about the financial markets and investment strategies. When it comes to investing especially, knowledge truly is power.
Michael R. Murray is a certified financial planner, practitioner and a vice president of investments at the Franklin office of Robert W. Baird & Co. He is a member of The Cairns Group, a team of Baird financial professionals and support staff working exclusively on behalf of Baird clients.
April 4, 2003 Small Business Times, Milwaukee