Okay, you’ve decided what you want to accomplish by investing, and you know what kind of stocks you are looking for. You have a handle on the potholes that can hold you back, and you’ve learned how to number-crunch to analyze a stock’s performance. You have one step left: deciding how you will apply all this knowledge to your investments. This is both the easiest and the most difficult step of all.
Think of it as buying a car. You’ve done your research: You’ve compared the prices at other dealers, you’ve checked the prices of comparable cars. You’ve checked the car sales market to find out how this brand is selling and when the best time to buy one is. You’ve even spoken to prior customers to learn just how the salesmen here haggle. What’s your initial offer for the car going to be? How much will you accept for payments? What options do you want in the car? It’s time to start making some real choices.
An investment strategy is rarely black-and-white. Instead, investment strategies are usually a mix of the different options available. My own experience has been that as my portfolio grows, my investment options grow in direct proportion. In addition, the number of investment strategies represented in my portfolio grows, also in direct proportion. Investment strategies, like investment objectives, should remain fluid in order to adapt to the different circumstances in which you will find yourself, as well as to accommodate any new ideas you yourself will come up with.
An exhaustive list of investment strategies is impossible because they are as individual as the people who employ them. Stories circulate about people who pick their investments by using dart boards, astrology, and (so I’ve heard) even monkeys. As a new investor, however, you should be aware of some of the more popular (and saner) methods people employ for investing in their stocks:
The recommendation strategy
The research strategy
Buy and hold
Dollar cost averaging
Mix and match as you see fit; take what you want and leave what you don’t like. In the world of investing, the only right answer is yours.
Recommendations
When people learn you have begun your investment career, “experts” will begin to crawl out of the woodwork. In all fairness, a significant number of recommendations you receive will have true merit. People who discuss the companies they work for are certainly in a better position to discuss their internal structures than the average person on the street.
TIP:
A recommendation is advice or information, sometimes unsolicited, received from other people who may possibly have better insight into the stock than you do.
Furthermore, your friends and family may be able to provide real insight into a company and its products and services with which you may be unfamiliar. When deciding whether to invest in Home Depot, for example, I asked a friend of mine who is an engineer to tell me of his experiences with them. I write financial books; I couldn’t hang drywall if it came up and introduced itself to me. After our discussion, however, I felt much better about my final decision.
I asked my brother for much the same kind of information before making an investment in a video game stock. I don’t play video games, but he does extensively. My discussions with him enabled me to make an intelligent decision about which games were hot, which systems had problems, and what innovations were being anticipated by consumers.
The other side of the coin is best illustrated by a great commercial currently running on television. A young guy walks up to a very distinguished gentleman in an art gallery and whispers to him, “I overheard your stock recommendation last week and put all my money in XYZ stock.” The older gentleman replies, “Good for you. They will be the only company authorized to produce Widgets once the Martians take control of Earth,” as his nurse leads him back to the home.
The moral is obvious: Recommendations are a wonderful source of information as long as you know their source and the recommender’s expertise on the subject.
Research
Research is a vague term, and it could include pretty much anything. Asking people to share their experiences is research, so is requesting a copy of the company’s annual report. Checking the general press is research, as is digging up evaluations of the stock on the Internet. As a result, a precise definition of “research,” one that applies to every stock and/or investor, is difficult to give.
That does not mean that research in itself is impossible to determine, but rather that each individual investor needs to determine for himself or herself which “research” pertains to the type of investment decisions he or she is evaluating. Besides asking my brother for his insight into video games, I also checked the total sales of video games per year in the United States on the Internet. I read several articles on the system that was being launched and its implications on the video game market.