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Investing with the Pros: Part One of Three
So, you think you can invest? Hopefully after reading this series and taking the advice of some of the financial world’s greatest minds, you’ll be a success too.
“Free advice is worth the price.” – Robert Half
1. Planning
The first thing to do is to put aside a fixed amount of money for investing, whether it’s a portion of your salary or a bonus you were fortunate enough to get. Deciding how much you’re prepared to invest (which is essentially how much you’re potentially prepared to lose) leaves the rest of your income in tact. The last thing you want is to find yourself unable to buy food or pay rent because you were, as Nassim Nicholas Taleb terms, Fooled by Randomness.
2. Homework
Only deal in sectors you understand by choosing small companies (often ignored by institutions and analysts) that may be hidden gems. Warren Buffet (who considers The Intelligent Investor by Benjamin Graham the greatest financial book of all time) advises choosing companies that aren’t too flashy. Sometimes companies with dull names and dull operations that people need to keep using regardless of the economy (waste disposal?) can be amazing.
Don’t buy just because you see something you like or trust the tipper’s reputation. Instead of blindly accepting everything you hear as the truth, treat initial information as though it were an anonymous tip. Find out what makes the share tick, what drives earnings, and what looks set to spur the company on. Examples include a new product, a management change, or gaining market leadership. A company operating in a niche with added protection such as barriers to entry and/or proprietary rights is also a good sign.
Ultimately, you have to use your practical experience and personal expertise to learn as much as you can. Milk your broker, call investor relations, read reports online, take a trip to visit headquarters, and visit stores to get a feel for the company. The investment must make sense.
3. Financials
A good idea is to wait until financials are released. Then you must study the fundamentals, something very few “investors” actually do:
• Income Statement: Look for high and increasing dividend and earnings yields as well as high and increasing pre-tax return on capital. Note director comments on future earnings and make sure earnings growth is above average for at least five years.
• Balance Sheet: Look for high and increasing book-to-price (trading at a discount), cash flow-to-price, and assets-to-debt. Avoid shares with weak or weakening balance sheets (those with high and increasing long-term debt to equity).
• Cash Flows: Look for high and increasing cash from operations (which indicates current sustainability) as well as high and increasing cash from investing activities (which indicates future prospects).
• Market: Look for low beta, low P/E, PEG (price equity to growth) close to one, and high liquidity (to prevent large bid-ask spreads and trading stagnation between announcements). If the company is buying back shares, it means you should be buying too.
• Management: Go into business with people you trust and admire. Look for solid management with a track record of good moves and where they are prepared to invest their own money alongside yours. Read the proxy statement to make sure executive compensation is based on performance.
Recommended reading
Making of an American Capitalist by Roger Lowenstein
Money Masters of Our Time by John Train
Fortune’s Formula by William Poundstone
Rich Dad's Conspiracy of The Rich by Robert Kiyosaki
About Me
I have been an active writer for over a decade and published my first book in August 2007. This marked the start of Varsity Blah, a personal development blog that has now received almost 250,000 hits from over 120 countries worldwide. This article is one of almost 100 posts that were compiled into my upcoming book, which was reviewed on Authonomy.com: “This is some very insightful stuff… The way the book is structured, paired with your capabilities of drawing great narrative, leads this on the right path. This cleanses the mind.”
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Graduating from college with distinctions in financial accounting and classical piano has given me a uniquely creative approach to all I do. As a personal development copywriter, I specialise in creating content on improving health, relationships, finances, and career. This includes writing and editing articles, papers, blog posts, web copy, and much more. My professional background in marketing (as well as my extensive experience as one of the first external bloggers for the World Advertising Research Centre) means I can also provide case studies, company profiles, and whitepapers focused on branding, communications, digital media, and market research.
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