With investing, as with almost everything else in financial planning, there is a tendency to get to tactics before the strategic questions are clear. If you are young and find yourself with a little extra money at the end of the school year, what should you do with it.
Questions to know the answers:
Where to start so this makes sense and is actionable?
There are always two values for a stock. The real value and what the market says it’s worth.
The market assigns value at a point in time by an auction. People on both sides of the deal.
When you buy a stock you no longer have money. You have the stock and probably you can sell it someone, some other day. For how much is unknown. Some people buy paintings, antiques and rare books on the same conditions. They might be able to sell them when they need the money. The stock market at least, is more available and has more participants. No one knows the future price because that depends on how the other participants are feeling that day.
Sometimes when you want to sell, all of the other buyers are cranky and won’t give you much for your stock. Other times they are euphoric and will pay whatever you ask. You cannot know ahead of time which will appear.
The stock market assigns prices, but has little to do with the value of the underlying business. That depends on people and if you must have the money for you stock, you must deal with whoever is available and how they feel that day.
The fundamental value of a business is strangely easier to determine, even though it looks harder than music theory.
A stock is ownership of a business. Its intrinsic value depends on its future and the many things that affect that. Most of them are objective. You must have at least a hint of how the business behaves.
Eventually you ask yourself a question. “What would I have to believe to make this my best choice for my money for X months?”
Usually people answer in several ways.
And all places in between.
Buying investments is like buying a computer. You cannot know which one to buy and what price to pay until you know what you want it to do for you. Amazon buys computers based upon different factors than I do. Both are computers but theirs won’t work for me within my budget and mine won’t work for them.
Know what the investment must do and know when it must do it. Investing is purposeful and time sensitive and those two conditions will limit what is available for you to buy. If you would suffer from the loss of capital, time becomes more crucial.
Everything is context. Own investments whose behaviors that your needs.
For the speculator types, who need success in the short run remember this.
The long run only matters if you are there for the whole time. It does not matter how the long term works if you cannot survive the short term.
Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario. In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.
Please be in touch if I can help you. email@example.com 866-285-7772