Monday, February 25, 2013

An Owl's Guide to Investing

Almost exactly one month ago, I received a picture message at work. This is nothing out of the ordinary, as the practice of physically showing you the many things that are wrong with your department is common and encouraged amongst bosses. To be honest, my own phone is stuffed with photos of the subtle inadequacies of my subordinates. Cardinal rule #1 of bosshood is to constantly remind everyone else that you know how to do things better than they do. And I definitely do. Which is why I blog.

But this photo was different than the others - it was from Caitlin. This did not, however, preclude the possibility of a display of my shortcomings (due to the striking similarity between wives and bosses). But when I opened the photo, I was not greeted by a snapshot of our bedroom floor littered with my clothing or the sink full of dishes, but by a nose. The nose had a backdrop of two round, puppy eyes and a pair of big floppy ears. It was the ears that got me. These were not your average cute puppy ears, but more of a "these ears are a trip hazard to everyone in a 10 foot radius" pair of ears. "CAN WE KEEP HER?" read the message below. And that is the story of how we obtained a puppy.

That night I came home from work late. Caitlin was working a night shift, and I was excited about meeting the new addition to our family. As I walked down the hallway to our apartment, I could sense that something was amiss. Things were quiet...too quiet. Caitlin had already left for the night, so I slowly retrieved my keys from my pocket. The cluster of keys clinked as I raised them to unlock the door. That's when I heard the crash. I scrambled to get the door open, but it was too late. To this day I do not understand the physiology behind it, but I am no veterinarian. Within the five seconds that it took to unlock the door, our new pup ("Lady") had vaulted herself over the gate, bolted across the living room, defecated directly in front of the door, and then retreated behind the couch. As I burst through the door I tripped to avoid the poop. Scenes from Home Alone flashed before my eyes as I plummeted to the ground in slow motion.

Fortunately the poop was spared and I survived the tumble.

One of the most important lessons I learned about investing early on was that everyone makes their own first impression. There is always an initial hurdle to get over in order to make your portfolio successful. If I had taken my initial hypothesis of Lady (malevolent dog will poop on the floor whenever loose) and failed to give her the opportunity to prove otherwise, there would be no room for growth.

The Rules

There are a lot of "rules" out there when it comes to market investing: rules to double your money in 30 days, rules to turn pennies to profits overnight. Beginning investors must first learn the rules of valuation before determining what advice they want to take.

Know the market; know the numbers - Never take a professional's word as an ultimatum. Equip yourself with the tools to reinforce personal and professional theories. How do you determine the health of a business? How do you explore the potential of a market?

The first company I ever bought into was Bank of America (BAC). With only one introductory accounting class under my belt, I purchased 100 shares of a company that was down-and-out in the hopes of a bounce-back from the national stalwart. Bank of America had seen a catastrophic drop in 2008 from over $50/share down to under five, but had recently bounced back to $7.20. Value investing at its finest, right?

I would like to say that my gamble payed off. I would like to say that I foresaw a frenzied rush of investors with dollar signs in their eyes. But when the engines started to rumble and the stock kicked into gear, I was nowhere to be found. Within 18 months the company breached $18/share. I had been left in the dust, having sold my shares six hours after purchasing for a 2% loss…minus commission.

What had happened? My opinion-based research had been extensive, so why did I back out? The truth is, there is a difference between being convinced and being assured. It is important to remember that there is no methodology for guaranteeing a profit in market investing (if you know a methodology, please leave the algorithm in the comment box below). Figure out the formula that you believe to be a winning combination so that you can rest assured in your decision as opposed to being convinced by secondhand research. I'm not saying that reading other savvy investors' opinions is the path to ruin, just that there will always be opposing outlooks to shake your faith. Fear and doubt are the enemies to growing your wealth. Investing should be exciting and - dare I say it - fun. Without a solid foundation based on numbers, you are leaving a gap for fear to seep in - which leads me to my next point:

"Re-research" your stocks regularly -
 The choice to become a shareholder in a company is simultaneously a decision to own a business. Due to the rapidly evolving nature of these modern businesses, it is essential to periodically ensure that the ship is still pointed towards its original destination. A change in management or a spinoff of a subsidiary can quickly alter the dynamic of a company. Monitor the financials of the company in conjunction with the organization's shifting focus. Depending on the size of the company, the effects of these changes can swing a value investment to a growth investment and vice versa.

In addition to keeping up with corporate news, it's not a bad idea to create a spreadsheet and track key figures week to week or month to month. Numbers such as the price-to-earnings ratio, current ratio, debt-to-equity, etc. are the lifeblood of the company. It is important to check these vital signs and see how they trend over time.

Conclusion (for today):
The stock market has a notoriety that investors either tend to take too seriously or too lightly. Diversification is one of the keys to dispelling the uncertainty surrounding this notoriety. Always remember to do your own research before buying into the opinions of others, and keep up with the great investments that you choose.

Back in my apartment, I eyeballed the small mound of "narrow miss" from my vantage point on the carpet. As I picked myself up off the floor a thought ran through my head. I was actually thankful for this experience. How am I supposed to know how to effectively train her if I don't experience her mannerisms? Ok, maybe I'm stretching it a little bit - truthfully, the only thoughts crossing my mind at the time were "what is my game-plan for eluding PETA over the coming months" and "is punting puppies illegal?" But hindsight is 20-20. When it comes to investing, it is prudent to take the positive approach. Trust the numbers and be grateful for the opportunities at low points - after all, a crated dog will learn no tricks.

Next time: My 'not so conservative' stock pick of the week

Disclaimer: no puppies were punted in the writing of this blog.

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