As mentioned in my previous blogpost, “Investor 101: Are You a Speculator or an Investor,” there’s a distinct difference between a speculator and an investor. Both risk their capital investing in the stock market in the hopes of extracting a reasonable rate of return on their investment; however, each apply different investment strategies to achieve profitability.
For the speculator, a combination of cyclical norms, such as buying stock in the fall of the second-year of a presidential cycle and holding until the end of the year or sell in May and re-enter in October, and chart analytics are the tools of the trade. In this regard, the speculator is always attempting to time the market so as to adhere to the stock market axiom “buy low, sell high”. There are two fundamental problems with such speculative strategies: 1) your timing has to be right over 50 percent of the time in order to make any gains; and 2) you have to know when to pull out of a stock in order to limit your losses. That’s not to say that such timing strategies aren’t effective. However, as indicated in this article from Forbs.com (“What? Some Proven Investment Strategies Are Too Simple to Accept?”), none of the speculative strategies work every single time. Hence, knowing when to fold ’em is critical for the speculator as his bottom line can be significantly impacted if he is wrong on either end of the “timing chain”. Pull out too soon and you could miss out on substantial financial gains. Stay in too long and you may loss any gains achieved from the point of purchase.
For the investor, knowing when to buy is far more important than knowing when to sell. As with any stock purchase, you want to get in as close to the ground floor (lowest buying price) as possible. Why? Because as an investor you’re looking to buy value at the lowest price and hold the stock for an extended period of time, generally no less than 5 years. Thus, value investing is your investment strategy with “buy and hold” as your guiding philosophy. The value investor looks at a company’s BIC – balance sheet, income statement and cashflow analysis – to find solvency, value, long-term growth and, of course, potential profitability in the company before making a stock purchase. The value investor is, therefore, looking at stocks as a business owner and takes the long view on investing.
The basic tenet of investing is to make a good assessment of whether the value of the investment will increase regardless of which investment strategy you employ. The key thing to remember is to do your research before you buy a stock. Nevertheless, if you follow the four basic rules of investing and you’re able to keep your emotions out of the purchase or sell of any stock, you should see a reasonable rate of return on your investment regardless whether you’re in for the short or the long haul.
That’s my blogpost for this week. Join the discussion by posting your comments below. And don’t forget to tune in next week when I’ll once again share more ways you can break the debt cycle and then go…beyond.
Zebert L. Brown is the author of Break the Debt Cycle in 3 Simple Steps and a 16 year Navy veteran with specialties in administrative management, career development and public relations. Follow him on Facebook and Twitter.