How I Learned to Avoid Bone-Headed Financial Moves
Live and Invest in the Now, Not in the I Hope or I Wish.
A good friend told me last week she wanted to buy some Apple stock.
“Why?” I asked, sounding a little more shocked than a good friend should in casual conversation.
Luckily, she didn’t notice. “Well, it’s low now. Don’t you think Apple makes good products? Shouldn’t we buy what we know?”
“Sure,” I said, hoping now to avoid the issue. Why do I say silly things like “Why?” when I don’t really want to hear the answer?
Invest in the Now.
I love the old line that goes something like, “Deal with reality the way it is, not the way you wish it were.” Investments don’t perform based on what we hope. If they did, Sirius/XM Radio would be in every damned car by now and the stock would trade at $150/share (I can dream). As for my friend’s question…sure I like Apple products. I own so many of them I have to write quickly because I’m sure Tim Cook is calling with a personal “Thank you” any minute. But Apple isn’t the same company they used to be. They seem focused on recovering rather than creating glory. I don’t think Apple’s headed anywhere good (my personal opinion…not a stock tip).
Back in the late 1990s I was heatedly debating the rapid increase in obesity in the United States with another financial planner named Julie. I adamantly pointed to all the infomercials about workout equipment and vehemently proclaimed that this was where investing was headed in the future. In short, people were going to see the light and get fit. We should invest in sporting goods companies.
She laughed. “Workout equipment. You’re so Pollyanna, Joe. I’ll just go with diabetes drugs.” Guess who won? Julie’s diabetes drugs are in more homes than ever, while the “Stepper” is an afterthought.
Julie invested in the Now. I was investing in the I Hope.
How to Invest in the Now.
I needed to get it through my thick skull that you can’t predict the future. You can’t expect people to change. You can’t know where the market is headed tomorrow. Sure, you can listen to as many points of view as possible, but in the end, investing is still a bet.
Is that a scary thought….that the market could just crap out tomorrow? It should be. I don’t think people get nearly as afraid of investments as they should be, given the daily level of risk in the markets.
Here are five mantras I tell myself that help me deal with risk in the market and save me from making bone-headed financial moves.
5 Reminders to Help You Invest in the Now
1) Investment prices sink for a reason
When a stock/real estate/commodity price is down, there’s a reason it’s low. It’s not a “buying opportunity” that the universe created for your get-rich-quick-scheme. Dig deeper. Why is this real estate low? Is it market conditions? What’s creating the problem? Is it a plant closing in the area? Ask questions.
2) Our brains are too small to understand all the reasons a market moves
We can’t possibly know the reason a stock/real estate/commodity rises and falls, no matter how much homework we do. I don’t mention this to negate what I said above in point #1, but to accentuate it. Complete as much homework as possible, so you know as much information as possible before trading. However, realize that sometimes there is still going to be a reason you won’t understand.
Maybe a huge investor in Taiwan decides to buy $5M of your favorite company today because it’s his birthday. Did you know that was coming? What if a big Australian investor needs liquidity and sells $10M of your favorite stock to purchase a different company locally. Could you predict this?
Whenever you trade, there are going to be reasons that fluctuations occur beyond your comprehension and control.
3) We don’t know what “low” means
Saying an investment price is “low” implies that it will recover. How the hell would I ever be able to predict the future? If the price of a piece of real estate drops from $500k to $400k, how do I know it won’t go to $300k? The simple answer: I don’t.
The second I stopped acting like I had a clue where the market was going the following day was the day my investment results began to climb more quickly. I put more defensive measures in place to control my downside and became more attuned to seeking out as much information about a position as possible before I bought.
Once I knew that I didn’t know what “low” was, the harder I searched to find reasons an investment would decline in value. When it did decline, I knew how to respond much more quickly than I had when I’d guess the market direction. By not guessing, I became open to more outcomes.
4) Read about the future, but realize that news changes everything
News is the destroyer of plans. Once news strikes, forget all of your plans. That doesn’t mean it isn’t important to plan.
It’s important then, to ask yourself, what news could occur that would affect this stock/real estate/commodity. Start with the economy. What would affect the price? Then work down. In this industry what could happen? What internal drivers of this company could affect my investment?
See how I began asking questions? Many of these questions I would have never asked in the days that I thought, “Apple stock is low right now.”
5) Set a strategy to sell the moment you buy
Hopefully now you have (as I did), a better feeling for just how risky any investment can be. Once I know many of the risks (and have a better feeling for threats beyond my comprehension), I can put defensive measures in place to make sure I don’t get my ass kicked.
Investing is often as much about avoiding huge losses as it is about gathering big wins. Think about banks. What makes many banks successful isn’t that they score big on the wins. It’s that they make at least a little money on every deal. Think of all the ways banks protect their downside. Wouldn’t it be great to be in their shoes?
Start acting like the bank by practicing these mantras to experience better investment success.
What are your mantras and reminders?
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