Tuesday, October 6, 2009

Know vs. should-know

Robert T. KiyosakiRobert T. Kiyosaki via Last.fm


Chinese has an expression, "If you live near red ink factory, you'll be red. If you live near black ink factory you'll be black." What it actually means is you hang with people similar to you. If you hang out with lambs, you'll be a lamb. If you hang out with wolfs, you'll be a wolf.

Or as Rich Dad would have put it, "Average people hang out with average people, and average people aren't rich."

Mr. Kiyosaki, in one of the seminars in Canada via telephone, said something similar: "One way for an average woman to appear beautiful is to hang out with three ugly women. Most people hang out with people equal or worse than they are. To become rich, you need to hang out with people who are BETTER than you."

In other words, you need to raise your standards. If you hang out with "losers", you sink to their level, and your intellect will NOT be challenged much. If you hang out with "winners", you will eventually RISE to their level, and you will learn many things.

This has far more implications than you think, as are most "simple but profound" truths.



As Rich Dad have said, "the most expensive advice is free advice."  If you hang out with average people, would you take stock tips from them? Or even any tips about money management?

But consider this... WHERE did you learn how to manage your money? Probably from your parents. However, your parents are probably not rich, or else we wouldn't be having this chat. Considering the source, can you really trust the advice you are getting?

Yet people WILL take "hot stock tips" from their uncle Joe or best friend's friend Bob or whoever. Please don't. If that tip is so hot, they'd be rich already.

Remember Reagan: "Trust, but verify."

Another thing to consider is the "mania". If everybody says "buy buy buy", like real estate, or stocks, or mutual fund, and everybody is buying a piece like it's the next best thing since sliced bread, it may be time to sell sell sell (and tell your closest friends the same thing).

Why? Two simple reasons:  "buy low sell high", and "trust, but verify".

1) You don't "buy high and hope it'll go higher". You "buy low and sell high". If you arrived late to the mania, prices have already gone up by speculating. When the bubble burst later, you'll lose money.

2) "Trust, but verify", and weigh the info against the source of the info. WHO said one should "buy"? Complete stranger? Sales people? Broker? What do THEY get out of it? What is THEIR motivation? Sales people are out to make commission. They would not care if you make or lose money.

Conversely, in a panic situation, when everybody is selling, you may be able to pick up some bargains. When everybody is selling, prices are driven lower, give you impetus to "buy low". When the economy rebounds or the crisis passes, you would be ready to "sell high".

In other words, you need to have a goal in mind, and keep your own counsel. For example, you bought stocks in a company at $20. You see good leadership, good numbers. You expect the stock to go to $40. Something happened to a competitor and the whole industry becomes depressed. Stock dropped to $10. Do you sell out in panic, and lose half of your money? That would be what most people would recommend. However, if you trust your instincts and your analysis, and hold on to the stock, you would have made money when the panic sellers lose money.

My friend was asking me about Vonage maybe 2-3 days ago. He said there was some news about Vonage and Apple, and stocks shot up 25% in one day. Should he buy. I told him sell, sell, sell. That was August 31st.

By the time he got the news, the stock already went up and was on the way down. While it did not go all the way back down below a dollar, it's way down from its max of 2 dollars.

And what was the news? Vonage released an iPhone app that allows iPhone/Vonage users to access Vonage's VoIP network. BIG DEAL! (sarcasm). If he had bought it back in Mid August he'd be good, but if he only picks stocks mentioned in the news he'll lose money every time.

In other words, don't let external emotional factors complicate your investment goals. You can't invest by emotion.



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