Posted by Robert on July 26, 2010
Although I’m a stockbroker, I don’t think everyone should invest in the stock market. There is no “one size fits all” solution to invest for the future. But I have noticed one thing in common among successful investors: they own what they know.
An entrepreneur owns her business. She works in her business, she understands her business and she has control over her business. If she wants a better return, she can change her strategy, hire different people or increase her offerings. She will have a reasonably good idea of the value of her business and she’ll be willing to sell only for a fair price. Otherwise, she won’t worry about the price people are willing to pay to buy her business, because she’ll be focused on earning a profit.
A stock market investor owns stocks. He knows how to read companies’ financial reports, he knows what common indicators to look for and he knows how to question management. He is comfortable owning a variety of businesses and he probably has a good idea of the value of each. He is unlikely to panic and sell his shares during a crash and unlikely to overpay during a bubble, because he understands each one.
A real estate investor owns real property. Whether she’s a real estate agent or a landlord or a developer, she is familiar with the local market for real estate. She understands what people value and what they don’t, she understands the difficulties of buying, selling and renting and she’s willing to borrow large amounts of money to make a profit in the real estate market. She’ll have clear ideas about the value of her properties, and she will only be willing to make a deal that seems reasonable to her.
A collector has knowledge about certain items. Whether it’s sports cards, coins, stamps, old cars, art or anything else, he understands the rarity and value of certain objects. He also knows who else is in the market and is able to buy and sell profitably.
It is possible to profit by buying, owning and selling a variety of things. People who have little or no knowledge are less likely to profit. People who have no knowledge at all should “invest” in safe vehicles such as GICs, savings accounts and savings bonds. This way, they are guaranteed a return with certainty and don’t risk losing money by making a mistake. Then, little by little, the saver can learn about and start investing in one area. As their knowledge and confidence grow, it makes sense to allocate more and more capital away from savings toward investment.
What do you know about? How does it affect your investing?