Invest for the long term and Invest in what you know

These are crazy economic times, the Dow Jones went from 14,000 to 6,500 and back to 10,000. If you own a home you have seen the value drop from 20% to 50% depending on what part of the country you live in. This is the first time in modern history that home values have dropped nationally, yes, various pockets of the country’s homes have had down economic times before, but that has been region specific based on unique economic conditions in each area. But this is the first time that American’s have seen a national drop in what has been historically their largest and safest investment. How much have we really spent?

In the last ten years Americans, and the world have seen two huge economic bubbles; first, the Nasdaq/tech bubble of the late 90’s and more recently the worldwide housing bubble. The first merely caused a routine recession, the latter almost caused a Depression, unlike one we have seen since the 1930’s, and we are still not totally in the clear yet. But what makes these bubbles different from the one’s of the past is technology and media. The availability of information through televisions, wireless, and the Internet available to everyone has expanded these bubbles to the general population. Plus, the advances in technology has given the ability to almost everyone to participate. The advance of the Internet has given almost every person instant access to day trading further fueling the bubble of the Nasdaq, and the advances in technology allowed most people to participate in the housing bubble, by allowing fast underwriting and appraisals through technology. So our economic bubbles now affect all people not only the professionals and Wall street.

So how do investors and ordinary workers who have pension plans and 401k’s and savings to invest protect themselves, and even more important how do they make money and save for their retirement? The simple truth is the average investor should never have been participating in these bubbles. When investing the plan should always be for the long term, and yes I know it is difficult to avoid investing in things when your friends and neighbors are doubling and tripling their money on a matter of months, sometimes weeks, but you must resist. Perhaps, the two greatest investors of our generation or any generation for that matter are Peter Lynch, who ran Fidelity mutual funds for decades, and the world’s richest man Warren Buffett. Both have very simple and similar theories on investing. For Peter Lynch, it was invest in what you know and what you use, and what you like. If you worked on your house as a hobby and went to Home Depot, that is something you used and liked, if you bought Home Depot stock you understood what you were buying. If you got up in the morning every day and ate Kellogg’s Raisin Bran or went to Starbuck’s everyday it was something that you used and understood. But buying Cisco Systems that powers the Internet through systems the average man doesn’t understand might be a stock an engineer might buy but probably not a Postal Worker. Now, just cause you used these items, that meant it was only a potential investment. People still need to do their homework, check out management, earnings, timing. For many investors mutual funds are a far better way to go, but the same principles apply, invest in areas that you understand.

Mr Buffet’s theory is very similar, invest in businesses and concepts you can understand. his largest holdings are Coca Cola, pretty simple concept, Wells Fargo a bank, American Express, the credit card industry isn’t going away you lend and get paid back interest, Geico the insurance company, again pretty basic. He also owns See’s candy and Dairy Queen. he is the every man of investing, his philosophy is to invest in things that are used everyday and that are easy to understand. And he has stood the test of time. In the late 90’s, Mr. Buffet’s holding company Berkshire Hathaway was under performing the markets for the first time in his career. The critics said he had lost his touch, the 70 something year old had not kept up to speed by not investing in technology. Mr Buffet called it a bubble, that he didn’t understand the companies business models, that in many cases could not understand what they did, his critics said he was thru. The Nasdaq crashed in 2000, Mr. Buffet is the world’s richest man. In 2008, the market crashed, Mr. Buffets net worth dropped by 50%, critics said his buy and hold theory was dead, while the Dow Jones Industrial tanked, Mr. Buffet bough more Wells Fargo, one of his largest holdings at 20 dollars a share, it’s now 31 he bought General Electric at 13 it’s 17. he bought Goldman Sachs at 115 it’s 190 and the list goes on. He buys great companies, he does not worry where the markets go on a day to day basis because he believes if you do your homework and buy great companies over time you make money. But he doesn’t buy all the time, he has one last credo, buy when most are fearful and sell when most are greedy, because markets are imperfect and tend to overreact to human emotion.

When investing stay away from the hottest trends, you are not an expert. Ten years ago most people I knew were buying tech stocks and making a fortune, the problem was they thought they were stock market geniuses. They weren’t they just caught a bubble. And most people who think they are smarter than they are don’t know when to get out and buy more and more and usually with borrowed money. A guaranteed recipe for disaster. And for all those people who thought they were overnight geniuses in the stock market, most lost all their investment in the end. The same thing held true with the housing market. Five years ago most people I knew were buying homes and trying to flip them. or some bought multiple homes with easy credit and borrowed money and thought they would be the next Donald Trump. The people that were the real experts made a fortune and got out, but the average investor, most had too much leverage and too much greed, for them, it ended up a disaster.

None of this means investing is wrong, or trying to flip a home is a mistake. It means don’t ride trends, don’t think you know more than you do, it means do your homework and buy what you know. If you want to try and by homes or apartments for rental income, know the area, don’t use too much leverage and invest for the long term and make sure you can hold through the rocky times because they always come. The same holds true for the stock market. There are no get rich quick schemes that work, all they will do is get you poor quickly. If returns seem to great to be true they probably are. If people tell you it’s different this time, I promise you its not. It is your money and your future be careful with it, be smart, invest carefully and remember successful investing is a marathon not a sprint.

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1 Comment

  • When it comes to investing in these troubled economic times, the one piece of useful advice I can think of, which king of goes in line with what you’re saying, is: Hope for the best, prepare for the worst.

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