November 23, 2009

The "Secret Sauce" of Investing

A well known fund company likes to say that they have a "secret sauce" when it comes to investing in various companies. The ingredients of the "sauce" are not really secret, but in what amounts and how they use them is. The ingredients I am talking about are research and experience.

As an educator, your first year in the class room you made "rookie" mistakes, and you learned from them. Every single industry is just about the same, but with investing, you must also have thorough research to dig into to understand a company.

The "secret sauce" is that balancing act of combining the right amount of research with the right amount of experience to know if you are choosing a great company that has a great future or a company that looks "cheap" and it should be.

I have tried to preach research and education over the past year and a half, and hopefully, all of you have heeded my advice. There is no one that can say that they make every single decision perfectly, but when you have all of the information in front of you, what is it telling you? At this point, in steps your experience.

In your profession, most new educators have mentors that help guide them along through the various potholes of the first year or two. Financial professionals sometimes have the same, but whether they do or do not, most fall back on their own thoughts and values.

Research

When you look at the various funds that you have to choose from in your accounts, are you looking at just last year's performance? The last 3 years? The last 5 years? Are you taking into account the various categories of investing to make sure you are diversified? Do you know what you are buying?

I have my own thoughts on different funds for different situations, but one of the best tools to use to analyze any mutual fund starts with Morningstar (www.morningstar.com). They have free tools and a system of categorizing each fund along with a rating system (1 to 5 stars) for most funds (I am not advocating to purchase a subscription - use the free info). You can also use Yahoo! finance to see if there were any recent "news" articles on the fund you are researching. These are definitely not the only resources available, but they can be a good place to start.

Once you have acquired this information, this is where that experience and learned knowledge come into play.

Experience

In October 2008 (six months before the bottom of the stock market), Warren Buffett wrote an Op-Ed piece in The New York Times called, "Buy American. I am." In the piece he gave two pieces of information that every investor should always understand:

  • "A simple rule... : Be fearful when others are greedy, and be greedy when others are fearful."
  • "Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over."
So one of the most seasoned and successful investors of all time gave you a few bits of information: 1) When everyone wants in... be cautious. When everyone wants out... start buying. 2)The direction of the market changes well before the sentiment and the economy, so if you are waiting for the good news to invest, it will be too late.

Looking Forward

The fund company that I visited believed that their funds were positioned for a 2010 economic and job recovery. They gave great ideas, analysis, and predictions for the future of the market and the domestic and global economy. The question has thus become not if the US is going to continue to grow, but at what pace and what areas?

What Does This Mean to You?

Today's post is not about investing all of your money today, but instead more about trying to make the right decisions based on research and experience. Reevaluate your allocations, see if they are still in-line with where they should be. Should you be more aggressive or more conservative? Should you contribute more to your retirement now? Do you have your debt and savings where they should be?

Just a little reminder that while the market and economic recovery bodes well for the future, it does not mean that there are not lessons to be learned.

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