How I Invest
Investing is not a science, and there is not one way to do it (some are financially fattening while others financially slimming). What follows is what I do. It is something that I am comfortable doing, have had success in doing and feel that it is the most financially rewarding way over the long term.
Business Analyst vs. Stock Market Analyst
Primarily, I am a business analyst and not a stock market analyst. What this means is that I do not focus on the stock market or the economy as a whole. That may be the sexy part of the business–where everyone goes on T.V. and says the stock market/economy is going to do this or that–but this is not what I do. Instead, I investigate businesses on an individual basis.
As a first step, I ask the question, Can I understand and analyze this company? Answering this question requires me to be humble and recognize what I know and what I do not know. For example, I am going to have an easier time understanding the business of movie theaters than a pharmaceutical company.
Next, I work on a rough estimate of the value of the company. Once again, this step is not precise, but rather approximate. We all make mistakes and even our most secure predictions often turn out to be wildly inaccurate. Investing is not a science where precise calculations are required, in fact, rough estimates provide a safety zone to buffer you against the imprecision of investing. Recognizing that I am only approximating the value of a company encourages me to be conservative at each stage. It reinforces the idea that when I do invest, I should always remember to seek out a buffer zone.
When To Invest
Business valuations do not fluctuate on a day to day basis, in the same way that you do not put up a For Sale sign on your home with a different price each day. However, the stock market is unique insofar as people do put up For Sale signs on the businesses they own with different prices each day (sometimes, vastly different). This unique situation allows for you to wait for great deals to buy and great deals to sell. However, for the majority of the time, when my wife asks what I did today, I respond, “I waited”. When the prices are not right, you are free to wait (and read, of course). Being patient is the third step and potentially the most difficult step in practice. Investing gives you the option every day to do something or do nothing. Doing nothing for quite some time provides you with the chance to do something big when the opportunity presents itself.
Keep It Simple
Keeping it simple dovetails well with the idea of humility and patience that are at the core of my approach to investing. If precision calculations are required to ensure a solid investment case, then it isn’t a solid investment. It is always good to remember that there are no called strikes in investing, in fact, I hit best when they finally bring out the tee.