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

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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Risk Management in Your Life and Investments

Investing is part of life and not a separate entity. So, it is important to have your financial life in order before even starting to invest. Build a stable financial platform for your life first of all.

Pay off any credit card debts: It is difficult for a beginner to make 18% a year on investments but that is what you are probably paying on credit card interest.

Build a cash reserve: Put enough money in a bank account for six months of food, utilities and mortgage payments. Investments do not always do well so do not find yourself losing money on an investment that should have gone to buying food for your children.

Buy instead of renting: One of the best investment deals around is still the deduction of mortgage interest from your federal taxes.

Once you have done these things the next basics of successful investing are to decide why you are investing and to develop investment strategies to get what you want.

Decide How Much Money to Put at Risk

There are generally safe investments like many dividend stocks and there are growth stocks that may result in a hundred fold return on investment or may go bust. The basics of successful investing require that you diversify your investment portfolio to include safe albeit low paying investments and investments with the potential to let you retire early to a life of ease. The longer you have to invest before you want to use your money the more risk you can take. If you are simply investing for retirement you can pick a handful of higher risk stocks knowing that if you lose money on them you can make it back with the slow steady returns of you conservative investments. If you are investing to put your children through college you will have a shorter time frame.

Learn and Practice

While you are waiting to get enough money together to start buying stocks start reading about the stock market. Learn about the various market sectors. You can get a lot of quick information from sources like the Google or Yahoo Finance pages. And continue to read. There is always a lot of hype written about the markets and individual stocks. Read what the experts say and then wait to see what happens. For example, at the top of a market rally there tends to be a lot of enthusiasm that evaporates along with inflated prices as the market crashes. And, pick a couple of stocks that you like. You can simply note the price in a notebook and pretend that you bought it or you can buy one share of a stock like Apple for about $100. In either case you will learn how to pick stocks, follow them, read financial reports and when to sell before a correction.

Look for article II of basics of successful investing next week.

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