The other day, one of my family members called to get my advise about investing. They said they had a bit of money to invest and were wondering what they should do.
“Should I invest in gold, that’s what my mum said”. I chuckled a bit. I know why she was being told that buying gold might be a good investment. And, just to be clear, I am not saying gold is a bad investment. I have some investment in IAU ETF as well. But, the reason I laughed is because here we are… We are dealing with opinions that may or may not be true. So, I thought we should look at things from an objective perspective and see if we can look at some data. More on that later…
First things first, I told them I will not pick the investment strategy they should chose. That is on them. The fastest way to ruin a relationship is the get money involved. I did not want to be held liable if their investments didn’t turn out as well as they had hoped.
Here are 3 pieces of advice that I gave them
- Defining your Investment timeframe
- Learning about Investing
- Learning how to keep things on track
Let’s cover each one of these in detail
Defining your Investment timeframe
To me, this maybe the most important thing that one needs to do before they invest any of their hard earned money. Let’s say you have a 10K to spare and you are looking to have your money earn you more money, you have to think whether you are able to keep that money in the market for 3 months, 1 year or 5 years. Let’s say you are good to keep that money in the market for a year. Now, consider if you want to keep making changes to your investments. If you are not looking to become a part time trader and have your family and work commitments, you shouldn’t need to keep adjusting where you invest that money. For many folks, set it and forget it (for the chosen time frame) might the best strategy.
In fact, there is evidence to support that people who review their portfolio once a year vs. others who review it on a short term basis tend to have larger gains on their investments.
I use this strategy very effectively. In fact, every time I have an additional chunk of change that goes into the market, I define a time frame for that chunk of change.
All monies are not equal, it’s okay to treat them differently.
What do I mean by that?
I mean that when I look at money in my checking account and I try to keep that to about 6 months of living expenses, I might think about putting that half of that money in a 3 month CD. So, even if I lose my job and have bills to pay, I will have 3 months of living expenses in cash and in 3 months, I will have another 3 months supply without any risk associated with losing it.
Understanding Investing and Inherent Risks
You don’t have to go and become an financial analyst to consider investing. One of the things you have to do is not follow blindly what others are doing. Platforms like Robinhood are making it extremely easy for anyone to invest any small of money (big or small) and making immediate gains. My worry is that if you do not understand some basics of investing, it is nothing but gambling your money away.
So, how do you process the risk in investing?
First of all, remind yourself that if you put your money in the market, there is a chance you could lose it all. Don’t believe, let’s take a look at MicroStrategy. The stock went up from trading around 100$ to 3000$ from 1998-2000. And then, from Mar 2000-2001, the stock lost 99% of it’s value and went back to less than 100$. You just can’t time the market when it comes to individual stocks.
So, instead, if you are just getting started, look at ETFs.
What is an ETF? (Exchange Traded Fund).
Basically, an ETF is a basket of funds with a particular strategy applied to it. So, think of it as that instead of figuring out how much of that 10K do you want to invest in MSFT or NVDA or TSLA, you can look into just buying SCHG (Schwab U.S. Large-Cap Growth ETF) and you can find out the basket break up by going to various websites. I like going to MarketBeat.com where on the holdings page of SCHG, I can see the break-up.
The biggest advantage of investing in ETFs is that you protect yourself from situations like what happened with MicroStrategy.
Well, what if you wanted to try to take a chance in investing in a situation where you could get 3000% return?
How do you go about finding a company that might have it’s stock just rip? Well, the answer is no one knows, unless you are an insider. So, if you have some useful information that others don’t have AND you are NOT an insider, go for it.
For others, we can use information that have been put together by analysts and try to invest based on their advice. So, how I go about doing that?
Here, we are talking about a situation where I want to invest in a single company and I fine with potentially high risk, high reward situation. I use data again in that.
Let’s go to Marketbeat.com together and then click on “Research Tools” and the go to “Stock Screener”
Once you are there, let’s click on “Adjust Filters”
Now, comes the part where knowing what plan I have in mind is important. I might have a scenario where I want to invest that 10K and see what gains I can make within a single week. I am comfortable with losing some of that money but I also want to try to make a quick buck. So, I might try to take a chance and see if earnings report date is date around which I might invest my money.
So, I enter the criteria for companies that have their earnings in the next 5 days
The analysts consensus is that company is a “Buy”
And, I want to invest in Tech companies
And I get a list of companies
Now, how might I chose between the various companies here?
Do you the basics? Do you understand what is the Market Cap of a company?
Market capitalization, or market cap, is the total value of a company’s shares of stock. If a company has issued 10 million shares, and its share price is $100, its market cap is $1 billion. Market cap is calculated by multiplying the number of stock shares outstanding by the current share price
So, in other words, if someone wanted to buy all the shares of Adobe, they would have to pay 285B$. Okay, let’s think about this. If someone had enough money to buy Adobe and the current owners of Adobe want to sell the company, would they sell it for 285B$? Not sure, why would the current owners want to sell?
This is when a quick comparison of Market Cap to Revenues is helpful. A quick search of Adobe revenues informs me that their revenues are about 20B$. So, in other words, it will be about 14 years or so to get to 285B$ (assuming there is no growth). However, I know Adobe is growing very well (10-11% the last couple of years). So, doing some simple math, tells me that I can get to 285B in not 14 but 10 years or so. Now, let’s consider the buyer of Adobe. Would the new buyer want to give up 285B$ today and get revenues over the next 10 years cover their investment? Maybe, maybe not? If that Market Cap was 40B and their revenues were 20B every year, that suggests that you would recuperate your investment in 2 years. Well, in that case, the current Adobe sellers wouldn’t want to even sell Adobe. It makes no sense. So, this back and forth between what sellers want to sell their company (or a piece of the company which is called a share) and buyers want to buy a company (or a share) is what drives the stock price up or down.
A multiple of 2 in above scenario is a huge “Buy” sign and it’s not something you will see and a multiple of 20 might be a huge “Sell” sign. Looking at Adobe, the factor is 14+. So, even though the company is great, has a great growth rate every year, it is possible that the stock trading at 626$ might mean that it is at the peak that it could get to. A lot of people have already bought Adobe because they think others would buy it a a higher price and that’s what has kept pushing it’s price up. It just can’t keep going up forever, unless, they release their earnings report and unleash some news that now people think, their revenues might jump to 25B next year. Then the equation changes and buy-sell tussle begins. This is what you need to understand at some basic level before you buy. Hope you get the idea here.
Now, if you do decide to put that 10K into Adobe and you buy 4 days before earnings, it’s good to remind yourself of your timeframe. You wanted to make a quick buck, so establish a target and put in a order to sell it as soon as it hits 675 or 700 or whatever. The point is to keep reminding yourself of your time frame and the risk/reward profile you are willing to play with.
Just so it’s clear, the above laid out plan isn’t my framework for finding companies to “gamble on”. I was simply explaining that you need to have a framework on how you would find companies that “fit your criteria” of timeframes and risk/reward you are willing to play with. I am simply explaining the process and that everyone has their own process and everyone should have a process rather than just investing in what mum says or their room mate says.
Writing down your initial objectives somewhere
Here is a very important piece of advice before you begin investing. Stop thinking of investing in market as a get-rick-quick scheme. It has to be a strategy. Understand some basics, understand your plan and try to stick to it. There will be many times when things do NOT go your way. It is possible that a few of your stocks go down more than 50%. Now, in some situations, if you learn that company was involved in some fraud and that the value might go even lower, it’s better to cut your losses and get whatever money back you can get.
However, the markets are always cyclical. So, it is very possible that the same companies that are trading 50% below what you bought them for will go up 200% in the next 3 years. If your investing timeframe was 3 years, having your initial plan on paper and going back to it for reference can help you by not making you rush into panicked decisions and sell your investment just because it went considerably down.
Summary
In summary, understanding your time frames for investing, gaining knowledge about the Investing and maintaining discipline are key to building long term wealth.
Have Fun and Invest Sagely
The content was authored by me and title of the post was generated by an AI.
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