Imagine a little, elderly lady wearing a home-made sweater with embroidered kittens on the front, sweat pants, and a pair of neon green crocs, pushing a cart up and down the aisles of the grocery store. This is our clandestine professor of investments today.
A sharp shopper can teach an investor valuable lessons on how to choose a good investment using these three principles.
#1- BUY ON SALE
Our cart-pushing professor knows this four letter word well. In fact, if she can help it she doesn't buy until she sees this word displayed. Often times investors are just the opposite. They get excited to buy when things are going up in price. Almost invariably, if someone gives you a stock tip it's not because the stock has gone down!
If our little lady buys a gallon of milk this week for $3 and then next week milk is selling for $3.50, she's not happy about that. Why? Because she's a net buyer of milk. As a net buyer of investments you should like them more when they go down in value. Buy things on sale.
#2- BE AN INDEPENDENT THINKER
Our astute teacher doesn't stop, like most do, at the most brightly colored and conveniently located (but most expensive and least nutritious) boxes of cereal. No, she continues on toward the lonely end of the aisle to the homely, bulk-bag cereal.
There's a powerful phenomenon in the investment world called herding. This is a basic facet of human behavior. People see everyone else doing something and receiving what appears to be a reward that they would also enjoy (in our case making easy money) and they can't tolerate being left out. This inevitably leads to trouble when it concerns investing whether it be technology stocks in the late 90's, Las Vegas real estate in 2007, or what we're seeing today in junk bonds. Investors must take caution to not make decisions solely because they're popular. They should strive to have an independent mindset.
#3 UNDERSTAND WHAT YOU'RE BUYING
Our shopper isn't just indiscriminately throwing mysterious items with unpronounceable ingredients in her cart; she's reading labels, paying attention to nutrition facts, comparing to similar items.
Understand the quality of what you invest in. Publicly traded stocks, for instance, have easily accessible nutrition facts- their financial statements are public information. If you're not comfortable reading them, have someone you trust do that before you invest.
You can get as complicated as you'd like with investing, but some of the most important concepts really can be learned from a savvy shopper. Again, they are: (1) Buy on sale- you should have a fear of heights when it comes to prices paid for investments; (2) Be an independent thinker- buying something solely because everyone else is (and consequently its price is increasing) in not an acceptable reason and you should be extra careful here; and (3) Understand what you buy- don't wake up one day and think "why in the world did I buy a sushi vending machine business!" The degree of understanding an investor employs in decision making is what distinguishes speculation from investment.
Next time you're looking for some sage investment wisdom go hang out for a few hours at your local super-mart.