Topic: How To Invest

The best investors’ intelligence may seem to be gained from their ability to make sense of unpredictable events—but we think there are better things to look for

Worrying too much about the wrong things, like unpredictable stock market events, takes a toll on results and diminishes an investor’s intelligence

Many investors spend a lot of time worrying about the wrong things. In particular, they worry about things that are unpredictable. Even if they happen, these things may have only an indirect impact on their long-term profits. As a result, they have little time to pay attention to things that have a direct impact on the value of their investments.

At times they may mull over every tidbit of economic information that comes out, and how it differs from its predecessor of a week or a month earlier. This type of investors’ intelligence looks to detect a pattern—a sign that the economy is mending and headed for a return to steady growth, say, or perhaps deteriorating and doomed to plunge into a new recession. Others look for patterns or omens in domestic or international politics, or in demographic data, or in the price of gold.

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These investors often feel they can cut their investment risk by selling some or all of their stocks in times of high risk, and buying them back when risk is low. This never works well for long. After all, risk as portrayed in the media, and genuine market risk, are two different things. No matter how you try, it’s hard to pinpoint market turning points, if only because you have to outguess so many other smart people who are trying to do the same thing.

You’ll rarely if ever sell near the top, or buy back near the bottom. If you could do that with any consistency, you’d “make all the money in the world,” as the saying goes.

If you constantly worry about the “big picture,” you may at times manage to sell at just the right moment to sidestep a serious downturn. But you may only do that after sitting through a series of downturns. The downturn you avoid may turn out to be the last in a series—the “final leg downward”, as short-term traders like to refer to it.

A true display of an investor’s intelligence comes in knowing when to buy, when to hold, and when to sell

It is easier to hold high-quality stocks that perform well over time. But we don’t recommend that you hold indefinitely.

We advise selling particular stocks when we feel the situation has changed and they no longer qualify as high-quality investments. We also sell if we decide that a stock isn’t as high-quality or well-established as it needs to be to cope with the challenges it faces. Of course, many of our sales are due to a successful takeover of a company’s stock, which generally results in a major profit. 

In short, our strategy is “buy and watch closely.”

Of course, there are a variety of ways to build an investment portfolio. Some work better than others. Our Successful Investor approach has done well for our clients and readers over the past few decades.

There’s no easy answer to a buy-now-or-wait dilemma. At times it may pay to hold off — for instance, a company’s stock will often rise when it announces a stock split, then fall after the split takes effect.

In the end, our stock buying advice is that if a stock is truly worth investing in, you should be willing to buy it at current prices.

Investors’ intelligence: Why smart investors look for hidden assets

One of the sweetest and most profitable pleasures of successful investing is to buy high-quality “value stocks” (or stocks that are reasonably priced, if not cheap, in relation to sales, earnings or assets).

Hidden assets are valuable assets that investors overlook, discount or disregard altogether. They have special appeal for companies that are using takeovers to grow. They can be found in real estate, research spending and in brand names and so on.

If you buy a stock for its hidden assets, but those assets stay hidden or ignored by investors— or turn out to be less valuable than you thought—it can’t hurt you much. The best hidden assets will eventually expand a company’s profit, grab investor attention, and push up its stock price. 

You should always look for hidden assets when evaluating a stock. Stocks with hidden assets are not rare, but they’re hard to find. These three financial ratios can be used as a guide to further evaluating stocks with hidden assets once you have found them: price-earnings ratios, price-to-book-value ratios, and price-cash flow ratios.

Investors’ intelligence: Undervalued stocks are worthy investments  

Value stocks are stocks trading lower than their financial fundamentals suggest. They are perceived as undervalued, and have the potential to rise.

There are numerous reasons as to why a value stock is underappreciated and inexpensive. The company could have experienced a stagnant (or even depreciating) period, which is why they fall into the category of “value stock.” Their business could have experienced temporarily lower sales than they had in the past because of bad publicity, legal issues, or simply lagging behind competitors.

A value stock could go through a turning point where most investors ignore it, but savvy investors see that there is also a great potential for it to bounce back and make a bigger impact in the market.

An investor’s intelligence about the market often comes with experience. What mistakes did you make as a beginning investor that you would never make now?


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