A lot of folks will be transformed into angry and annoyed intellectual after reading the topic of my article. And they will have to be placed over some liquid refreshments to bring their temper down. But that's alright as this whole routine is something we have been exercising for many years now.
Dictionary meaning of Speculation is 'engagement in business transactions involving considerable risk but offering the chance of large gains, esp. trading in commodities, stocks, etc., in the hope of profit from changes in the market price.
'In my view, Speculation is a state of mind. The only difference between an investment and speculation is not what an investor does but to what he wants and what his level of knowledge is. For example, Someone tells you that X stock is going to go up and you just go ahead and buy it without any further research. By comparison, someone else could know everything about X, it's prospects, the industry, it's peers and come to the conclusion that it's a good buy. Clearly, the very same action, depending on how much an investor knows, could be intensely speculative or could be a carefully considered investment.
A carefully taken decision not only reduces the risk of loss but it also gives you a confidence to hold on to your stock if there is a fall in the overall market. There is nothing wrong in checking the calls of various financial advisors on TV or in some Stock Market Tips Website but you must do your own research and check all the important details of company, its competitors, valuations, future prospects et cetera.
Are you, in this sense, a speculator? Here are a few checkpoints. The more of these you answer yes to, the closer you are to being a speculator:
a) You never try to balance risk between different investments.
b) You buy stocks of companies without a clear idea of how their businesses work.
c) You choose which new issues to invest in based on the ads of those new issues.
d) You buy stocks because they've gone up.
e) You sell stocks because they've gone down.
f) You think a stock with a lower price is cheaper than one with a higher price.
g) You think the previous checkpoint is a mistake.
h) You answered yes to most of these checkpoints and yet you are sure you are an investor and not a speculator.
Sunday, March 2, 2008
Invest in quality businesses, not stock symbols
For most people investing in a stock is little more than watching the trail left by the stock symbol as its price wanders along some drunken path. They know that the symbol is associated with a company while not being too sure what is expected of this company to ensure that its share price will rise. It is a case of let�s sit back and hope for the best.
Then there are others who deliberately do not want to know anything about the activities of the company. They want to study the pure movement of the stock price with the belief that they can use this information to make forecasts about the future movements of the price. This is like trying to play bridge without looking at the cards. It just makes no sense to ignore the fact that the stock symbol is attached to a company. And it makes no sense not to apply sound business principles to analyze these companies. The more we know about the company, then the more confident we can be about the price of the stock. Not on a day to day basis, but over time.
So before buying a stock, think of it in terms of buying a whole company, just as if you were buying a store down the street. If you were buying a store you would want to know all about it.
What were its products?
How consistent are the sales?
Do they keep trying new products or do their products stay fairly constant?
What competitors does the store have and what distinguishes it from them?
What would be the most worrying thing about owning such a store?
This leads to the idea of looking for companies that have a strong and durable economic moat. Just as castles have moats to protect them from invaders, so companies can have economic moats to protect them from challenges of competitors and changes in consumer preferences. The moat can be made up of attributes such as brand name, geographical position or patents and licenses.
All these principles about purchasing businesses are equally applicable to purchasing shares. It becomes one of the most enjoyable parts of investing to look into the �business� aspects of any company that you are considering adding to your portfolio.
Don�t invest for ten minutes if you�re not prepared to invest for ten years
When we look at the share price of a company we usually see a wildly fluctuating graph with mighty hills and plunging chasms. For example, on the right is the graph of the daily closing prices of a company over ten years. It would be a brave person who could look at this graph and say what was going to happen in the next 24 hours, let alone the next 5 to 10 years. Yet this is a typical graph of the prices of a listed company.
In other words, as investors we focus on the medium to long term business characteristics of companies. It is these that drive the share price. Focusing on the short-term aspects of a company including both business and price fluctuations is foolish. Even though we focus on the long-term, the investment is even more profitable if we purchase the stock during one of its drops.
For most people investing in a stock is little more than watching the trail left by the stock symbol as its price wanders along some drunken path. They know that the symbol is associated with a company while not being too sure what is expected of this company to ensure that its share price will rise. It is a case of let�s sit back and hope for the best.
Then there are others who deliberately do not want to know anything about the activities of the company. They want to study the pure movement of the stock price with the belief that they can use this information to make forecasts about the future movements of the price. This is like trying to play bridge without looking at the cards. It just makes no sense to ignore the fact that the stock symbol is attached to a company. And it makes no sense not to apply sound business principles to analyze these companies. The more we know about the company, then the more confident we can be about the price of the stock. Not on a day to day basis, but over time.
So before buying a stock, think of it in terms of buying a whole company, just as if you were buying a store down the street. If you were buying a store you would want to know all about it.
What were its products?
How consistent are the sales?
Do they keep trying new products or do their products stay fairly constant?
What competitors does the store have and what distinguishes it from them?
What would be the most worrying thing about owning such a store?
This leads to the idea of looking for companies that have a strong and durable economic moat. Just as castles have moats to protect them from invaders, so companies can have economic moats to protect them from challenges of competitors and changes in consumer preferences. The moat can be made up of attributes such as brand name, geographical position or patents and licenses.
All these principles about purchasing businesses are equally applicable to purchasing shares. It becomes one of the most enjoyable parts of investing to look into the �business� aspects of any company that you are considering adding to your portfolio.
Don�t invest for ten minutes if you�re not prepared to invest for ten years
When we look at the share price of a company we usually see a wildly fluctuating graph with mighty hills and plunging chasms. For example, on the right is the graph of the daily closing prices of a company over ten years. It would be a brave person who could look at this graph and say what was going to happen in the next 24 hours, let alone the next 5 to 10 years. Yet this is a typical graph of the prices of a listed company.
In other words, as investors we focus on the medium to long term business characteristics of companies. It is these that drive the share price. Focusing on the short-term aspects of a company including both business and price fluctuations is foolish. Even though we focus on the long-term, the investment is even more profitable if we purchase the stock during one of its drops.
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