There was a post recently on avoiding '9 Investing Mistakes'. A set of good tactical points ('inability to take a loss', 'not selling winners', 'investing without a plan', etc.). You know what was missing in this (otherwise excellent) article? The word "value".
Yet "value" is at the heart of successful financial planning (not just investing).
- Buying a house? Is it fairly priced?
- Getting solar panels for your house? Is it of value? What is the return?
- Buying cryptocurrencies? What is the value? Fairly priced?
This notion of "value" is central to buying and selling things - and any discussion of tips/mistakes misses the point if it does not focus on this central point. It would be akin to providing a great recipe for turkey but forgetting about the turkey.
"Value" is often easy to understand after the fact. For example, we can tell now that a lot of companies during the dot-com boom were not worth the prices their stocks were commanding. But those who could not discern this then may have lost a lot of money. Making money by guessing (without knowing underlying fundamentals of what you are buying) makes you a lucky fool (or, a very lucky fool) but not an intelligent investor. The trick is to have a set of principles or guidelines that allow you to evaluate prospective purchases reasonably and fairly. So to ground your 2018 investments, and more generally, searching for value reach for that timeless classic "The Intelligent Investor" by Benjamin Graham.
For most people (except the very few market savvy investors), low cost funds/ETFs are the way to go. Even there you should have your own firm reasons why the S&P 500 ETF is the way to go for you versus (say) a broader market index ETF (like the Russell 3000).
So two simple rules for all of us ordinary folks to follow:
Rule 1: Don't do something just because someone says so.
This is the "greater fool theory." I am buying {X} because it has gone up so much since I first saw it (ergo must have value since so many people cannot be wrong). In such a scenario - the value of the X is its stock price. But remember the price of assets you buy (stocks, bonds, options) are all leading indicators of underlying value. It behooves you to understand this value.
Rule 2: Think like an "owner".
Someone asks you to buy a restaurant business for $100,000. Questions you will ask probably:
- When will I break-even, if ever?
- How much annual return will I get after I get to profitability?
- Over N years how much will I make? You will then compare this number to other places where you could put your $100,000 and decide if it makes sense for you.
This is the computation you should do when buying/selling stock, crypto, rental properties, etc.
Motto for 2018 - "Think like an owner."
Submitted November 21, 2017 at 07:57AM by arnexa http://ift.tt/2iDdFgu
