Live and Invest in the Now, Not in the I Hope or I Wish.
A good friend told me last week she wanted to buy some Apple stock.
“Why?” I asked, sounding a little more shocked than a good friend should in casual conversation.
Luckily, she didn’t notice. “Well, it’s low now. Don’t you think Apple makes good products? Shouldn’t we buy what we know?”
“Sure,” I said, hoping now to avoid the issue. Why do I say silly things like “Why?” when I don’t really want to hear the answer?
Invest in the Now.
I love the old line that goes something like, “Deal with reality the way it is, not the way you wish it were.” Investments don’t perform based on what we hope. If they did, Sirius/XM Radio would be in every damned car by now and the stock would trade at $150/share (I can dream). As for my friend’s question…sure I like Apple products. I own so many of them I have to write quickly because I’m sure Tim Cook is calling with a personal “Thank you” any minute. But Apple isn’t the same company they used to be. They seem focused on recovering rather than creating glory. I don’t think Apple’s headed anywhere good (my personal opinion…not a stock tip).
Back in the late 1990s I was heatedly debating the rapid increase in obesity in the United States with another financial planner named Julie. I adamantly pointed to all the infomercials about workout equipment and vehemently proclaimed that this was where investing was headed in the future. In short, people were going to see the light and get fit. We should invest in sporting goods companies.
She laughed. “Workout equipment. You’re so Pollyanna, Joe. I’ll just go with diabetes drugs.” Guess who won? Julie’s diabetes drugs are in more homes than ever, while the “Stepper” is an afterthought.
Julie invested in the Now. I was investing in the I Hope.
How to Invest in the Now.
I needed to get it through my thick skull that you can’t predict the future. You can’t expect people to change. You can’t know where the market is headed tomorrow. Sure, you can listen to as many points of view as possible, but in the end, investing is still a bet.
Is that a scary thought….that the market could just crap out tomorrow? It should be. I don’t think people get nearly as afraid of investments as they should be, given the daily level of risk in the markets.
Here are five mantras I tell myself that help me deal with risk in the market and save me from making bone-headed financial moves.
5 Reminders to Help You Invest in the Now
1) Investment prices sink for a reason
When a stock/real estate/commodity price is down, there’s a reason it’s low. It’s not a “buying opportunity” that the universe created for your get-rich-quick-scheme. Dig deeper. Why is this real estate low? Is it market conditions? What’s creating the problem? Is it a plant closing in the area? Ask questions.
2) Our brains are too small to understand all the reasons a market moves
We can’t possibly know the reason a stock/real estate/commodity rises and falls, no matter how much homework we do. I don’t mention this to negate what I said above in point #1, but to accentuate it. Complete as much homework as possible, so you know as much information as possible before trading. However, realize that sometimes there is still going to be a reason you won’t understand.
Maybe a huge investor in Taiwan decides to buy $5M of your favorite company today because it’s his birthday. Did you know that was coming? What if a big Australian investor needs liquidity and sells $10M of your favorite stock to purchase a different company locally. Could you predict this?
Whenever you trade, there are going to be reasons that fluctuations occur beyond your comprehension and control.
3) We don’t know what “low” means
Saying an investment price is “low” implies that it will recover. How the hell would I ever be able to predict the future? If the price of a piece of real estate drops from $500k to $400k, how do I know it won’t go to $300k? The simple answer: I don’t.
The second I stopped acting like I had a clue where the market was going the following day was the day my investment results began to climb more quickly. I put more defensive measures in place to control my downside and became more attuned to seeking out as much information about a position as possible before I bought.
Once I knew that I didn’t know what “low” was, the harder I searched to find reasons an investment would decline in value. When it did decline, I knew how to respond much more quickly than I had when I’d guess the market direction. By not guessing, I became open to more outcomes.
4) Read about the future, but realize that news changes everything
News is the destroyer of plans. Once news strikes, forget all of your plans. That doesn’t mean it isn’t important to plan.
It’s important then, to ask yourself, what news could occur that would affect this stock/real estate/commodity. Start with the economy. What would affect the price? Then work down. In this industry what could happen? What internal drivers of this company could affect my investment?
See how I began asking questions? Many of these questions I would have never asked in the days that I thought, “Apple stock is low right now.”
5) Set a strategy to sell the moment you buy
Hopefully now you have (as I did), a better feeling for just how risky any investment can be. Once I know many of the risks (and have a better feeling for threats beyond my comprehension), I can put defensive measures in place to make sure I don’t get my ass kicked.
Investing is often as much about avoiding huge losses as it is about gathering big wins. Think about banks. What makes many banks successful isn’t that they score big on the wins. It’s that they make at least a little money on every deal. Think of all the ways banks protect their downside. Wouldn’t it be great to be in their shoes?
Start acting like the bank by practicing these mantras to experience better investment success.
Photo: kenteegardin
What are your mantras and reminders?
I like “when others cry, you should buy”, but like you said, no recovery is ever guaranteed. And you have to wait for people to really “cry”, not jump in at the first market deep to find there are three lower bottoms. But generally I stick with dollar averaging and monthly contributions, the less I interfere the better.
OG mentioned this on the podcast Monday. We are our own worst enemy when it comes to deciding when to buy/sell.
There must be an ESP link among PF bloggers. This is the second post I’ve seen today on a very similar topic, call it emotional investing or bone headed moves, it’s pretty much the same thing. I posted an article yesterday on the stop loss, which this complements very well and in early February I posted an article on why to avoid emotional investing. I guess we’ve all been burned at least once!
Ha! I’m sure we’ll all get burned again, too, no matter how hard we try not to….
Yep, As thy say…. CaCa happens.
Great tips. One I would add is, if limiting the conversation to just equities, is to only invest what you are willing to lose. Individual equities are by nature speculative, as Average Joe points out. Conservatism is often the most sure route to equity based investing success.
http://snarkfinance.com/2013/03/04/why-i-dont-donate-to-charity/
Great advice. Often I’d recommend my clients separate their investments into “play” and “goal.” The play money was used to buy individual stocks. The goal money was invested much more responsibly.
Great post Joe! I wrote one that was in the similar vain a few weeks back. Doing your homework is huge and I absolutely follow #5. Once I do buy setting that stop loss is the next thing I do. It gives me peace of mind, plus it allows me not to sabotage my plans along the way. All too often retail investors make their click and hope decision and end up paying as a result…thus why making an informed decision (as much as possible) is vital. As an aside, I would not go anywhere near AAPL these days. I got my nice gain an on option a few months back and ran from it.
I cashed out long ago (too long ago). I’ve had people tell me all kinds of reasons to get back in, but I just don’t see it.
Wow, your friend with the diabetes drug hit it right on the head. Lots of people invest in hope or what they are familiar with, but often it’s way after the peak and becomes a bad investment or they end up not investing at all.
…which is exactly a reason to stick with mutual funds or ETFs for most investors.
Kudos to your friend for being ahead of the curve with that choice! It boggles my mind how some people are so adamant about timing things and how they truly believe they can predict the future…if only!
I don’t think she was ahead of the curve as much as she was focused on reality rather than hope.
I like to think about whether or not I’ll be upset if we end up having to hang on to the investment a long time. Our most speculative investment is also the one with the shortest time horizon – an empty canal lot that we’re hoping to sell in the next 5 years. And even if we don’t sell it by then, the expenses associated with it are more than covered by our other RE investments, so it doesn’t feel urgent to sell it.
A big part of successful investing and trading is to be able to put your ego to the side in order to see what’s really happening right now. It’s very easy to fall in the trap of trying to be too clever by anticipating what will happen when you should be reacting based on the information you actually have in front of you.
If you can put the ego aside then losses don’t matter as they aren’t a personal reflection of who you are. The number of times I’ve seen incredibly smart and overly confident people not follow #5 is mind-boggling. Sometimes you can definitely be too smart for your own good.
So investing on hopes and dreams is not a good plan? Well there goes my money. I don’t invest with emotion, nor do trade with emotion. It will get you nowhere.
You are a funny, funny man, Grayson!
Investing in the stock market is pure luck in my opinion. I had a former professor who bought stock for 75 cents and sold it for 75 dollars.
Wow, really? Pure luck?
Still learning about the whole investing thing; haven’t really jumped in the water yet, so to speak. However, your quote of “Deal with reality the way it is, not the way you wish it were” can be applied to your finances. Deal with the money situation in front of you, not how you wish it could be.
I established investing guidelines and generally follow those. I have written out certain criteria that I use when deciding to buy or to sell a given stock. If I move into another asset class, say bonds, I’ll have to write up another set of guidelines. In the past, I invested without much of a plan – and that went about as well as you would have predicted. Those days are over.
My mantra is “impossible is just an opinion”! There is always someone who will say something is impossible. Just realize it is just someone’s opinion.
I don’t dabble in individual stocks because I don’t have (or care to put in) the amount of time it would take for me to find out if one stock is a good deal right now or not. There are multiple people in one company whose job it is to follow one stock or part of one stock and I know there is no way I can replicate that myself with my job and my blog!
I hope because I talked about individual stocks you didn’t think this was just about individual stocks, Lance…. These rules apply to any financial decision with funds (“the market is low now”), real estate, etc.
Apple has gone the same way as all big companies – they are no longer interested in innovation, they only want to increase profit. It is exactly how Microsoft lost favor with the market and I expect Apple isn’t far away either.
As for investing – I pretty much have thrown out fundamental analysis, I trade entirely on technicals, candle sticks, moving averages and a range of other indicators. 9 times out of 10 it works like clock work and I don’t have to care about doing heaps of research.
I am just loving all of these investment posts! I love the story too about fitness vs. diabetes meds. It’s interesting to me that more people are choosing to cover the symptoms instead of reduce or eliminate them. Sounds like the same thing most are doing with their money. 🙁
It’s crazy how some news can drastically affect a stocks performance. A scandal that no one sees coming (except maybe internal employee) can tank a stock. Honestly, if I was a hedge fund manager I’m not sure I would be able to sleep at night just playing out scenarios that could kill my gains overnight.
Great post Joe. #5 is especially important.
Another example of investing in the now would be to invest in oil rather than green tech. We should invest in green tech, but with so many lobbyists and special interests in oil I’m not sure it will happen any time soon.
Setting your buy price at the time you buy is the best advice, IMHO. And it’s always a risk no matter what you invest in or don’t invest in. We try to keep our more risky investments to a certain percentage according to our ages/stages in life. The biggest risk is not saving any money!
In the real estate sector I am seeing more and more people crying that they missed the bottom of the market to buy. I get the impression that people are more concerned about “getting the deal” then how the purchase will build their personal portfolio.
It seems that more effort should be placed on determining personal financial goals and then find investments that meet those specific goals rather than creating cash flow based on an unreliable market.
Wow, Simon, you nailed it. Fantastic advice. Thanks for the insightful comment.