Friday, October 9, 2009
Know Your Investment
Rich Dad's advice regarding investment is know how to run a business, so that you know what works in a business, and is that business you want to invest in actually doing it (and is it avoidng the bad things).
If you think this is too hard, consider that this is what Warren Buffet does. That's right, Warren Buffet of Berkshire Hathaway. He doesn't invest in things he does not understand. And Warren Buffet have invested for a LONG time, ran many businesses, including Berkshire and Hathaway. Where did you think he got the name for his investment firm? Not all of his investments was successful, but he's good enough that he picked the right businesses to invest in by going after those companies with a lot of value, and now he's the most famous investor in the world.
Remember what Rich Dad said... Profit when you buy, not when you sell. He meant real estate, but it applies to stocks as well, but the point is you have to know your investment to know how much it is really worth, and thus, when to buy it cheap.
And most things you invest in are business related. Stock is partial ownership of a company. Bond is capital for a company. Same with options. Even the commodities are really about the businesses.
And why would you invest in something you know nothing about? Do you entrust your money with total strangers with no guarantees? (banks don't count as they are required to pay insurance premiums to FDIC to protect your deposits)
Did someone say the SEC? Is that the same SEC that let Bernie Maydoff get away with that Ponzi-scheme that stole probably billions of dollars? Please don't make me laugh, even though it's such a MORBID subject.
Thus it is necessary to understand how a business works, so you know what to invest in.
This is called FUNDAMENTAL trading. Because you look at business fundamentals, like assets, liabilities, income vs. expenses, and so on.
There is another school of trading called "technical trading". They do NOT analyze stocks. They only look at market PATTERNS, and try to guess what the market will do next based on the pattern. That's where you got such terms as "Santa Claus Rally" and "Election Year Mania".
Personally, I think that's a bit of, well, BS. But some people swear by them. And there are a lot of systems. There's the 1-2-3, the Japanese Candlestick patterns, the gaps, and so on and so forth. It wouldn't hurt to learn about them, that's for sure, but I wouldn't put all your eggs in one basket, if you know what I mean.
Most larger investment firms use a combination: use fundamental techniques to pick which stocks to invest in, but use technical techniques to determine when to buy and when to sell. Perhaps you should do the same.
You will make money if you invest right, but keep in mind: the richest people in the world are NOT traders. They are investors.
Investors differ from traders because trader is limited to stocks, bonds, options, forex, and commodities. Investors invest in anything that has potential of profit, be it precious metals, mines, small businesses, big businesses, real estate, or any other types of investment vehicles. investors also usually take the long view.
And the ULTIMATE investor is the successful entrepreneur who took a company public, and made it a giant in the industry, like Microsoft who made Bill Gates a billionaire. Bill Gates didn't trade. He made a business great with his investment of time and effort. In return, his business made him a billionaire.
So don't tell me you don't have money to invest. Time and effort can be invested too. Bill Gates started Microsoft with TWO employees, and bought someone else's work to create the first operating system for the IBM PC. His continued pursuit of excellence made Microsoft the way it is today. He didn't start with much. Apple was started by Steve Jobs and Steve Wozniak in their garage. Hewlett Packard was started in a garage as well (you can still visit the garage today in Palo Alto, CA). So don't tell me you need money to start. They started out with practically nothing. You can too.