I love the stock market. But, I’ll be honest, I don’t really understand it. That’s what analysts are for, right? Well, yes, and no. While I in no way mean to suggest that stock analysts don’t know what they’re talking about, I do mean to say that unless you understand what you’re buying in the stock market, you’re kind of buying blindly.
Interestingly, I’ve had a few losses in the stock market–and they’ve all been because I bought something I didn’t understand. At all. In a few cases, I had read columns written by ace traders, in another it was based on something Warren Buffet did, and in another instance, I was watching Mad Money while running on the treadmill. Those three stocks that I have ever bought in industries I didn’t understand at all turned out to be big, huge duds. By contrast, I bought stock in Lululemon (LULU) a few years ago, because I saw the writing on the wall. Not because an analyst said so, but because I literally, SAW it. I’m a yoga instructor; I’m a marathon runner. I’d never even heard of the brand until a friend visiting from NYC drug me into the then-tiny concept store in the Short North area of Columbus, OH where I live. I scoffed at the idea of buying an $80 pair of leggings. Today, I own about more Lulu items that I’m proud to claim, and the yoga studio I teach at could practically pass as a Lulu showroom in itself…Needless to say, it was a good buy.
Similarly (and perhaps ironically), I also bought stock in YUM! brands (YUM) awhile back–which owns Taco Bell and KFC, among others. I’ve been guilty of crushing a bucket of chicken every now and then and I practically lived on Taco Bell in college. They’ve expanded like wildfire into global markets, and I know firsthand just how addictive it is. Of course I’m going to buy it. I’ve made money on it, too.
The point, dear friends, is that when you’re buying stock there are tons of analyst opinions, and by all means, do your research and consider them all. But don’t discount the power of what you know, simply based on your own preferences. What do YOU buy? What products do you think are truly great? Which suck? The market might just indicate your opinions aren’t so unique.
In his New York Times column, Carl Richards recently wrote about the trend many headlines are shouting these days: The market is up!! But are the small “me” style investors what’s driving that trend? And are we buying smart, or just buying? The market will surely come down; it will just as surely go up again…sometime. Here are four investment rules I share for the not so skilled investors out there like myself.
1. Believe in what you buy. If you don’t understand it, don’t buy it. Yes, there is a lot of money to be made in emerging markets, new products, by shorting stocks, and by placing your bets on the manufacturer who makes the tiny chip that powers every smartphone known to mankind, but if you don’t understand it, there’s a good chance you also won’t understand when to get in–and out.There probably are people out there who’ll make a million dollars today doing any number of those things, but you’re not of them.
2. Don’t gamble what you can’t afford to lose. If you don’t have an emergency savings fund, or you’ve got credit card debt or other loans other than a mortgage, don’t try to jump into the market now to make a quick buck. Paying bills really isn’t exciting, but carrying debt and gambling on the market will cost you alot more in the end.
3. Know the costs of a trade. Trading online is fun! But it isn’t free. Know the costs of your trades, and the rules around them. For example, some mutual funds require that you hold it for a certain amount of time, or face penalty. If God forbid, you are trading on margin and you don’t know how you’d come up with the funds if the piper came calling–stop. Remember that if you are charged to execute the trade, even a fee that is seemingly insignificant erodes your profit margin, and/or escalates your loss.
4. Set an objective for your investing. Why are you investing? Did a coworker mention the market is through the roof (or at least, the roof we haven’t seen since 2007). You’ve kind of missed the boat. If anything, wait until it crashes and then get in. Are you looking to grow your tax refund? That’s a little more viable of a strategy, but again, are you going to sink that money into retirement, or a brokerage account to pay for a vacation in a few years? Figure out the implications, including possible tax benefits, and/or how to strategize your capital gains and losses. A win is only a win if you’ve got you’re other financial bases covered.
