Many of you are not interested in investing at all. I get this. What is fun, you ask, about balance sheets, cash flows and dividend policies? Well … very little. If that’s all investing was, I probably would not be writing this column.
But investing is interesting and, more importantly, fun. It is also a lot easier to get into than many expect. In fact, as a Whitman student you already have many of the skills required to become a successful investor.
The first requirement of a good investor is that he or she stay informed. He or she has to keep up-to-date with the latest happenings surrounding his or her portfolio of companies and be constantly searching for new opportunities.
Investors in BP, for instance, are very interested in the Egyptian election crisis going on right now. BP has sunk 14 billion dollars into infrastructure and equipment in the country and is being accused by opposition groups of working “hand in glove” with deposed dictator Hosni Mubarak.
If BP is forced to suspend, or even give up, its holdings in Egypt, it would be a massive blow to the company: especially considering that BP planned to expand its operations in the country in the coming months.
Having to keep up-to-date with all of this stuff may sound like a lot of work. It is, but no more than is required to be an informed, worldly citizen. If you read the newspaper and/or news blogs regularly, you are already doing half the work required to be a successful investor.
The other half requires a shift in perspective. While you should always ask how certain media informs your perspective, successful investing requires that you ask a second question: how can I profit off of this information?
Of course, a lot of research is required before you decide to invest in a company, but even this can be fun if you choose to invest in companies you know and are interested in.
This is Warren Buffett’s advice. Buffett refuses to invest in companies or sectors outside of his “Circle of Competence”, choosing to invest instead in those he is the most familiar and comfortable with. As a result of his diligence, Buffett escaped the dot-com bust of the late ’90s relatively unscathed.
While many investors lost nearly everything betting that Internet stocks would continue to rise in value, Buffett refused to invest. He said he had no business investing in internet stocks since it took him three hours just to figure out how to turn his computer on.
But this is Warren Buffett, arguably the greatest investor of all time. How can you as a smart, but relatively unsophisticated, investor hope to compete with the likes of Buffett? Well, luckily, you don’t have to.
Buffett, along with investors for big firms like J.P. Morgan Chase and Goldman Sachs, cannot invest in a good chunk of the market: namely in small companies. This is because of the tremendous amount of capital that they have to employ. In order for an investment in a small company to become a significant enough part of their portfolios, they would have to buy out most of the common stock issued by the company. In other words, they would have to buy out the entire company.
As a result, small companies are under-followed by institutional investors. All of their research and expertise, which gives them advantage over the average investor, is spent analyzing only the biggest companies.
This is where you as a small time investor have an edge. By focusing on smaller companies, you can reap big rewards. Finding these companies is a bit more challenging, of course. But it can sometimes take no more effort than flipping to the fourth or fifth page of the newspaper, rather than reading the front page headline no doubt about a big company like Exxon Mobil or General Electric.
I am by no means arguing that investing is easy. But it is certainly possible to learn to profit off of the market and, as Whitman students, isn’t this what we do best?
