Basics of Successful Investing IV

Basics of Successful Investing IV is the last in our series. We wrote about getting your financial house in order and making some basic decisions about why you are investing and how much money you are willing to put at risk in Basics of Successful Investing I. Our advice in Basics of Successful Investing II was that you should start out by investing in what you know. And, when you pick something else you need to do your homework and thoroughly understand what a company does to make money and how it will manage to keep doing so. And we looked at the concept of intrinsic value as a guide for when to buy stocks, when to sell and when to avoid them. In Basics of Successful Investing III we wrote about developing and refining the skill set necessary for making sound and profitable investments. And we wrote about limiting the number of investments so that you can practically manage your portfolio in the midst of a busy life. If you do all of these things will you make money investing in the stock market? Here are some practical thoughts on that subject.

A Practical Approach to Investing

Keep the basics in mind whenever you consider a new investment or whether to keep a current investment. And keep in mind that investment opportunities come and they go. A sad fact about the stock market is that way too many investors wait way too long to get into the market during a rally. This is coupled with the equally sad fact that way too many investors jump into a rally in its final stages and just in time for a major correction or market crash. Then they take their money out just at the bottom and swear off investing in stocks ever again. There are two practical points to be made in this regard. If the market is starting to go up and you are not sure, invest a little. Follow our suggestions about picking stocks that you know, understanding how these folks make money and what their margin or safety is when the market turns around. Beginning investors can put a few hundred dollars into a couple of stocks and start learning how to wisely pick and follow investments. And the other point is that the so-called blood in the streets analogy is true. The best time to invest is when the market or a given stock appears to be at its worst and everyone else is bailing out and driving prices down. Here is a practical example.


Xerox invented desktop printing. For a long time every office printer was referred to as a Xerox. Xerox was a verb: Xerox this please. Then in the late 1970s two things happened. Xerox had so much money that it started buying insurance companies. Hurricane Hugo hit the Gulf of Mexico and Xerox lost billions of dollars in insurance claims. The other thing was that Japanese, South Korean and Taiwanese companies were making printers, shipping them to the USA and selling them for less that it cost Xerox to produce them. The company changed management and started to set things straight. They wrote off losses from the insurance fiasco and substantially reduced production costs and improved their printers. They were making good money in the mid 1980s but their profits were diluted by the write-offs for the hurricane losses. At this time a group of investors started a takeover bid. They saw the value of the company although many investors did not. Along the way while the stock was trading at $60 a share and the investors got caught short on a margin call and had to liquidate most of their holdings. The stock fell to $30 a share in a couple of hours. Here is where the basics of successful investing come in. Anyone who read the Xerox financials and understood their story knew that here was a $60 stock selling for $30. By the next day smart investors had purchased the discounted stock until the price was back up to $60. This sort of story is repeated again and again in individual stocks and the market as a whole. Those who follow the basics of successful investing make money again and again.

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