After going on a 3-year hiatus from investing my money,
mainly due to the fact that I didn't have a whole lot of excess capital that
didn't go towards my students loans, I've decided to return to the game. I call it a game, because to me investing is
just a slightly more predictable and socially-acceptable form of gambling
(although I did just go 3 for 3 in roulette the other night). If you consider yourself good at predicting
the future, you’d make a great equity investor.
So without further ado, here are the three principles I live by when
investing my money in equities:
Invest in
Companies You Believe In- I made this principle first for a reason…and it’s
something that is constantly preached by Warren Buffet as well. Mr. Buffet was once quoted as saying, “Never
invest in a business you can’t understand.”
I’d take this piece of wisdom a step further and say, “Never invest in a
business you don’t believe in.” This requires
not only a fundamental understanding of what the company actually does, but a
resonating internal passion in the societal purpose the company purports to
fulfill. Ask yourself: out of the entire
stratosphere of companies in this world, which would I want to work/shop/learn
from? Which companies could I not live
without? When personally reflecting, Starbucks,
Jet Blue, Kayak, Netflix, and Under Armour resonate with me. For the purposes of this exercise, I only
chose public companies that are actually traded on the secondary markets, but I
hold great admiration for companies like Wegmans, Trader Joe’s, and Scottrade
as well (among MANY others).
Now that you have a general list in your head of
companies that actually MEAN something to you, evaluate their relative valuations
in the marketplace. This may sound
difficult, but look at it like this- which of the companies on my list do I
believe are undervalued? It’s not rocket
science, it’s personal judgment. For instance,
Under Armour has a current Market Capitalization (perceived overall worth) of
just over $9 Billion, while Nike, by the same metric, is valued at $64
Billion. Do I really think Nike is worth
over 6x that of Under Armour? Absolutely
not…especially given the expanding international reach of UA, the hard-to-value
“cool” factor of UA products, and quite frankly Nike’s stagnation as an innovative
and desirable brand.
Invest at the Trough
of the Market- This alone can earn you astronomical returns, regardless of
the company(ies) you choose to invest in.
And to me, this is the most simplistic and tried-and-true approach to
making money in a market that is so heavily influenced by high-frequency
traders and institutional investors.
Back in ’08, when I was still a High School Junior, the Dow Jones
started the year at 12,800. By March of ’09,
the index had virtually split in half, all the way down to 6,600. There isn't much certainty in this world, but
one of the more certain economic theories is that what goes up must come down,
and vice versa. I/you can’t predict with
100% certainty when the next economic trough will occur, or when we’ll be at
the peak of the market, but we do know that both are inevitable. Back to the prior example- in August of 2009
(after the March 2009 economic trough), I purchased shares of Boeing and
Amazon, both well-known companies. By
all admittance, I could have invested my money in Don’s Landscaping and been in
a good position today. The Dow Jones
Index is now up to almost 16,400 as I write this, Boeing is up 200% since
August 2009 (as in, it’s value has tripled!), and Amazon has jumped up 250% in
the same period. Of course, I chose AMZN
and BA for reasons more clearly articulated in Principle 1 of my overall
philosophy, but Don’s Landscaping wouldn’t have been a bad bet either. Either way, if you don’t know the markets
well, don’t invest your life savings when the economy is spiking (aka now),
wait until after we experience another noteworthy downturn so that you can look
like a genius to your friends/family.
Invest When
Critics are Louder than Consumers- Many people hate the undue influence
that a Research Analyst at [Insert
Fortune 500 Bank Here] has upon the prices of stocks s/he issues guidance
upon…..I love it. Because while they’re
issuing broad critiques from Ivory Towers across the world, actual business
transactions and consumer trends are influencing the marketplace in ways that
overpaid analysts can’t comprehend.
Research Analysts unfairly discount the power of consumer trends by
obsessing over the fine print of quarterly financials, among other immaterial
things. Due to the uniformity brought
about by GAAP standards, there is very little fine print that can’t be easily
assessed and analyzed by the investing public- and thus that isn't already
inherently apart of a company’s overall stock price. Netflix and Under Armour are prime examples
of what can result when misguided analysts input their personal opinions into
the highly reactionary world of investor discourse. These negative opinions artificially lower the
prices of the underlying stocks, creating the perfect arbitrage opportunity for
logic-minded investors. Of course, this
principle should be considered in concert with Principles 1&2, as while
Research Analysts have a great deal of undue influence on the stock prices of
companies, sometimes they’re actually
right. There is also merit in the corollary
to this argument as analysts can have undue influence on a stock’s price by
issuing an upgrade or praising a company upon very little justification. As much as I enjoy the occasional burrito at
Chipotle, for instance, I don’t feel like my $10 burrito provides me with $10
of satisfaction- and it was just announced that Chipotle is raising their
prices again. So good luck to them, and
to the analysts who say the company is worth over $18 Billion (while their
current valuation is $15.6 Billion), but each region of the US has their own
local Mexican hidden gems that can make a meaner and cheaper burrito than
Chipotle. I do, however, appreciate the
company’s “Food with Integrity” slogan, as I believe it puts pressure on
fast-food America to raise their supplier standards, or face the wrath of
consumers.
On this note, I’d like to end with a quote from Teddy
Roosevelt and the preface that nothing can stand in the way of a company with a
solid vision and open-minded leadership: “It is not the critic who counts; not
the man who points out how the strong man stumbles, or where the doer of deeds
could have done them better. The credit belongs to the man who is actually in
the arena, whose face is marred by dust and sweat and blood; who strives valiantly;
who errs, who comes short again and again, because there is no effort without
error and shortcoming; but who does actually strive to do the deeds; who knows
great enthusiasms, the great devotions; who spends himself in a worthy cause;
who at the best knows in the end the triumph of high achievement, and who at
the worst, if he fails, at least fails while daring greatly, so that his place
shall never be with those cold and timid souls who neither know victory nor
defeat.”
