The Advocate, Wednesday September 29, 1993
Does the stock market scare you?
In one of my previous columns, I talked about investing in stocks. How I got a hot tip on a "sure to go up stock" and lost. I'm sure we've all heard the stories.
What is a stock? Funny, I asked that question of a colleague of mine recently and he had trouble giving me a definition. Isn't a stock simply a certificate of ownership in a portion of a company? The more shares the certificate represents, the more stock you own of that comany. Simple, isn't it?
Wouldn't you agree that probably the best investment you could make would be in your own company? The problem is that most of us work for someone else and besides, many of us are not the type of individuals who could manage a business successfully. Wouldn't you like to own shares in a successful business and share in it's profits?
How does a person who has little time to research find those excellent companies? Those who feel they know how to pick the right ones I like to ask the question. "Can you name at least five things you should know before investing in that stock?"
Hardly anyone I ask that question can. Those who finally came up with five had to do a great deal of thinking. Another question I ask is, "Do you consider those criteria every time you invest?" They virtually all reply "no way."
Finally I ask, "Why do you buy the stocks you do?" The answer almost always was, "Because my broker recommended it." A few will admit, "Because I had a feeling or hunch." That's investing? We have a saying among financial planners: The broker you have, the broker you get.
I have been told by some of the best professional money managers in this country that they use up to 100 criteria to assess a stock. They like to use the word discipline when it comes to their particular brand of investing. They also have a full-time staff of people who do nothing more than research different companies they are considering investing in. They also visit these companies and talk to top management. Many go even as far as to analyze the companies' books over several years before they consider investing any money in them.
And then the problem comes up. Are they overvalued or undervalued? How do they figure that one out?
Well, the professional money managers know the answers. Even with all their expertise, they still make mistakes. That is why they diversify. It gives them a level of safety, not having all their eggs in one basket. They also have a large pool of money to invest. When buying in larger volumes, they also reduce the commissions charged, substantially. That's investing!
Yes, the stock market scares the hell out of me. But thanks to the professionals I use who make the critical decisions of buying and selling stocks, I can achieve above average after tax rate of return.
After all, as I stated above, the best place to make money is in the ownership of successful companies. And if you can't own your own business, the next best thing is to own a piece of other excellent companies and share in their profits.
Next, I'll discuss the difference between owning and loaning.
Money Matters Index