Before we delve into what we would do with $1,000 or $50,000 or $1M or even $100M it is best to repeat the following phrase in front of a mirror every single day you decide to make an investment.
“I am smart and I am not omniscient“
If you’re in your mid-twenties, or mid-forties it does not matter. Repeat the same phrase before you decide to make an investment. A man who has spent his life working for technology companies should avoid making large investments in retail companies, on the other extreme it is smarter for a man who has worked at hundreds of strip clubs to invest in starting his own rather than play games investing in technology stocks. Now that we have the basics out of the way lets take a look at the pitfalls:
Predicting the World Economy: Right now every talking head is going on and on about the “fiscal cliff” the resulting impact of Obama being elected, taxes, dividends etc. People are up in arms with regards to the tax rate on dividends – could be raised from 15% all the way up to 35%+! This is short sighted. At the end of the day, a republican will win sometimes, a democrat will win sometimes and eventually someone will lower or raise the tax rate and so forth. People forget quite easily, so take a look at what the talking heads were saying heading into 2012 “market should be flat to down”… now we’re up well over 10%+ and this does not even include the 2% dividend paid out. For all we know we could end this year down or up 20% but the point remains, if you’re going to make broad based bets on the entire world over the short-term repeat the last four words of the phrase.
Believing You Know Nothing: This is the opposite issue relative to predicting the world economy, you’re suffering from the belief that there is “nothing you know” instead of “know it all disease”. Unless you have spent your entire life living with mom and dad in the suburbs with zero hobbies watching TV all day, there is something you’ve been doing for an extensive amount of time that is of value. Take these skills and use them to generate cash flow.
Controlling Your Emotions: This is difficult to measure for the average investor. How will you react to a 50% cut to your investment? How will you react to a 50% move up? You should have a significant amount of tolerance for movements in the stock price or an asset you purchased. This is complex as the amount of variance you can tolerate is directly proportional to your percentage of net worth invested. For some a $100K investment will not break the bank on a 50% move however for others a 50% move on a $10K investment would cross your emotional threshold and force you to sell quickly. As a rule of thumb for an early investor, avoid leverage and invest amounts that you are willing to see go to 0%. This leads up to the final mistake.
Disaster is Actually Short-Term Opportunity : This is another simple psychological fact “It is psychologically more difficult to handle a $10 loss than it is to see a $10 gain”. This does not mean, “making money feels better than losing money” what it means is an equal loss relative to an equal gain will cause over selling. You see a disaster occur, capitalize on the opportunity and get out once people enjoy the gains.
A real time example is Generac, Hurricane Sandy:
Of course as soon as the masses found out you’re hit with this.
Conclusion: With this out of the way, for full disclosure we’ll only be providing stock picking insight into technology, health care and financial verticals (Reits/Credit cards), reflecting the core competencies we have. Before you start thinking about new years resolutions why not take time to ask yourself “What do I know?”… It could generate large sums of money in the future.
