Blog Post 6

Synthesis

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During my time researching how to invest prosperously, I obtained information about success stories from model investors such as Warren Buffett and Chris Camillo as well as tactics that have failed such as not diversifying and letting emotions dictate decisions. When asked how to invest prosperously, using the knowledge I’ve gained, I would respond that the best tactics are to diversify your portfolio, think rationally, and ultimately use as many resources as available to make well-informed decisions.                  

According to the article, “Investing disasters - when bad investments go even more bad!,” one up-and-coming investor, John, made the rookie mistake of not diversifying his portfolio. He put all of his investments into 3 small company’s stocks which is  the equivalent of a cardinal sin in investing. This was the first mistake that led to a downhill spiral of John’s capital. On the contrary, Warren Buffett, the most successful investor of all time, has one of the most diverse investment portfolios. Not only does he have a diversity of stocks, he also has holdings in many other companies not sold on the stock market. It is these outside of the box tactics that investors must use in order to invest prosperously.

According to the article, “Five Minute Investing: Things to Avoid,” falling in love with a stock is one of the most important things to avoid when investing because this has to do with emotion and nothing else. Investing is not a business of emotion, but instead strategy and rationality. Even if a stock has done so well for you for so many years, most of the time, this will come to an end. Investors often believe that “bull markets” will go on forever. By thinking irrationally like this, investors are setting themselves back. Another irrational way to invest would be the common practice of buying a stock in a downward trend. Although this may seem like a high risk high reward situation, which it is, the risk is usually far too high to be a smart investment. In order to yield a profit on these types of stocks, two things must go right. First, the investor must be able to predict which stocks will actually end their downward trend before going all the way to zero. Second, the timing of this must be impeccable, the investor must know exactly when it will turn around and buy the stock at the right price to yield a profit. The chances of being able to predict both of these is very slim, therefore, not a good investing decision. If investors practice more rational thinking, they will not be put in those sticky situations.

The last and possibly most important skill to invest prosperously is the ability to use your resources to make well-informed decisions. Successful investor, Chris Camillo, perfected this strategy. According to the article, “How One Amateur Investor Spots Stocks Before Wall Street,” Camillo used being an amateur as an advantage over the professionals by using his “more diversified set of friends and colleagues throughout the country that know more things than those on Wall Street”. He used people close to him to provide him with useful information about companies. For example, when his wife informed him that Target was going to do the Missoni line, he immediately went to Target to try and judge whether it was going to be successful or not. Once he realized it was a hit, he immediately invested. Within 48 hours, he had already tripled his investment. Warren Buffett, another successful investors was resourceful by reading about every aspect of the company he was investing in by studying their company records and researching their management.

There is no magic method that can guarantee success when investing, however, the only way to truly ensure safety when investing is to diversify your portfolio, think rationally, and ultimately use as many resources as available to make well-informed decisions. These tried and true investing tactics have been tested by some of the most successful investors such as Warren Buffet and Chris Camillo. Investing comes with a risk but there are ways to ensure some level of security.

How to Invest Properly

Investing Horror Story

Losing all your money

With the high potential rewards of investing. there also comes a great deal of risk. The article, “Investing disasters - when bad investments go even more bad!,” highlights the investing horror story of one novice investor.

John was a member of an up-and-coming start up company in Palo Alto in 1999. Since the company was quickly rising and his capital was increasing, he decided to invest some of the money that he had put away to use on the down payment of a house. When he set out to invest his money, he knew very little about how to invest prosperously. His first mistake, not diversifying his investments. He put all of his investments into 3 small company’s stocks which is  the equivalent of a cardinal sin in investing. This was the first mistake that led to a downhill spiral of John’s capital.

From the minute he started investing, the stocks had already started their downward bubbles. Over the next couple of weeks, John’s stocks had decreased 25 percent. However, the bigger issue is that he bought these stocks on margin, or borrowed money to buy the large shares. This was his next big mistake. So now, not only has his stocks dropped 25%, but he lost 50% of his capital because of all the money that he now owed because of what he bought on margin.

Instead of cutting his losses here, John fell in love with his stocks, another costly error on his part. As expected, his stocks continued to plummet until they fell about 90%. At that point he had reached a point called the “Margin Call.” A point where he had to pay back the money that he borrowed because he owed so much. His problem: he didn’t have any more cash. He was forced to liquidate all of his investments and turn it back into cash, just so that he could pay back what he owed. He eventually lost just about every dollar that he initially invested, money that was supposed to be used to put a down payment on his first house.

As shown by John’s story, it is very easy to get caught up in investing and live a horror story similar to his. This is why it is extremely important to know what you are doing before investing. If one wants to invest prosperously, they must learn from the mistakes of other novice investors by having a game plan before investing.

How to Invest Prosperously

What Not to Do 

www.moneyglare.com

A large portion of one’s ability to invest properly comes down to the luck of the draw, however, it is very easy to essentially “screw up” a portfolio by making simple, avoidable mistakes. The article, “Five Minute Investing: Things to Avoid,” points out some of the common mistakes that often trap beginner investors. The following are a few things to avoid when investing to prevent self-destruction of one’s portfolio.

1. Not having an exit plan.
1. Obviously every stock will not be a winner. This is something that early investors must realize, so before purchasing a stock, every investor should have a plan on how they will cut their losses. This “exit plan” should be thought of before the stock is purchased in order to avoid any irrational decisions due to the emotion that comes with owning a stock.
2. Plunging too much money into a stock at once.
1. Another common mistake is plunging, which means that too much money is invested in one stock, all at one time. This is actually two mistakes combined into one big one. Once an investor has put so much money money into one stock, the investor’s thinking begins to get clouded. By having such a high stake in one stock, the pressure is very high for the investor. “Plunging leads to cutting your potential gains short and letting your losses keep mounting - exactly the opposite of what you should be trying to accomplish.”
3. Choosing stocks in a downward trend.
1. Although this strategy may seem like it could lead to extremely high profits, it is extremely difficult to accomplish. In order to yield a profit on these types of stocks, two things must go right. First, the investor must be able to predict which stocks will actually end their downward trend before going all the way to zero. Second, the timing of this must be impeccable, the investor must know exactly when it will turn around and buy the stock at the right price to yield a profit. The chances of being able to predict both of these is very slim, therefore, not a good investing decision.
4. Falling in love with a stock.
1. This has to do with the emotion that comes along with investing and nothing else. Even if a stock has done so well for you for so many years, most of the time, this will come to an end. Investors often believe that “bull markets” will go on forever. This could not be farther from the truth. As cited by the article, even Warren Buffett, who is a long-term investor, cashes out of his investments that have made him billions. Few people can predict stocks like Buffett and even he knows when it is a real, educated prediction, or just his emotions forcing him to believe that his investments will continue to rise.

Investing in the stock market often comes down to luck, but sometimes investors need to know the difference between what they want to do and what the right thing is to do. In order to find the right strategy to invest prosperously, there is still many more things to be found regarding things the avoid and things to target.

The Greatest of All Time

SOURCE: www.forbes.com

How can one man go from being your average Omaha, Nebraska citizen, to being worth over $62 billion? Warren Buffett is regarded as the most successful investor ever. His unique methods and knack for finding an undervalued company separates him from his peers. The story of his road to the top of the investing world is shared in the article, “Warren Buffett: The Road To Riches" found on the leading finance website, Investopedia. Warren Buffett is now considered a household name not only for his fortune but also for his character. He is essentially a Wall-Street Guru and there is a lot to be learned from him. Warren Buffett was successful because he learned how to do value investing and how he managed Berkshire Hathaway.

Unlike amatuer investors, Buffett has been surrounded the investing knowledge from a very young age. His dad, Howard Buffett, was the owner of a brokerage firm in his home town of Omaha, Nebraska. Howard Buffett always stressed the importance of education to his son and urged him to apply to the University of Pennsylvania, where he later enrolled. Buffett was not impressed by the university and transferred to the University of Nebraska after two years. “Upon graduation, his father once again convinced him of the value of education, encouraging him to pursue a graduate degree.” He ended up studying at Columbia University “under Benjamin Graham, the father of value investing.” This is where the foundation of Buffett’s investing skills were acquired.

“Value investing, according to Graham, involved seeking stocks that were selling at an extraordinary discount to the value of the underlying assets, which he called the "intrinsic value"”. However, Buffett took this tactic a step further; “he wanted to look beyond the numbers and focus on the company's management team and its product's competitive advantage in the marketplace.” This the basis of the method that Warren Buffett used through his over 60 year career in investing. These tactics, that focused on evaluating the whole company, took Buffett to the top of the investing world. Buffett is now the owner of the Berkshire Hathaway, one of the largest holding companies in the world.

Buffett is not only recognized for his world renowned investing tactics, but also for his character. Many would ask what someone worth over $60 billion dollars does with all that money. Buffett would answer that question easily. He gives it to charity. A large portion of his money will go to the Bill and Melinda Gates Foundation. “Buffett's donations will come in the form of Class B shares of Berkshire Hathaway stock. His total donation to the Gates Foundation is 10 million shares. It will be given out in 5% increments until Buffett's death or until the foundation fails to meet the spending stipulation or the stipulation that either Bill or Melinda Gates remain actively involved in the foundation's activities. Buffett's 2006 donation was 500,000 shares, valued at approximately $1.5 billion. At a June 2008 share value, the entire donation to the Gates Foundation is worth about $37 billion. Buffett expects stock price appreciation to increase that amount over time.”

The story of Warren Buffett may seem unfathomable to many investors. To some extent, this is true. Buffett had to have a lot of things go right for him to amass his huge fortune, however, every investor has something to learn something from him. His diligence and preciseness when choosing to invest in a company was his greatest asset. Although all investors won’t be as successful as Buffett, they can all use his story as a template on how to invest prosperously.  

FUTURE RESEARCH: In my next blog post, I plan on researching how investors pick stocks for long-term financial success?

How to Invest Prosperously

Amateur Investors Often Have the Advantage Over Professionals

 

Source: http://www.valuewalk.com/wp-content/uploads/2013/01/Chris-Camillo.jpg

Have you ever experienced success through the stock market? Chris Camillo has and his story is shared through the article, “How One Amateur Investor Spots Stocks Before Wall Street”. Chris Camillo was just another marketing executive in Dallas in 2007. That all changed in 2007 when he invested $20,000 in the stock market. Over the next three years (which included part of the recession) that money grew into $2 million. Now Camillo is considered one of the most successful amateur investors and has been critically acclaimed for writing his book, Laughing at Wall Street: How I Beat the Pros at Investing (by Reading Tabloids, Shopping at the Mall, and Connecting on Facebook) and How You Can Too. Camillo’s story is a prime example of how anyone can be prosperous by investing.

Camillo used being an amateur as an advantage over the professionals by using his “more diversified set of friends and colleagues throughout the country that know more things than those on Wall Street”. He used people close to him to provide him with useful information about companies. For example, when his wife informed him that Target was going to do the Missoni line, he immediately went to Target to try and judge whether it was going to be successful or not. Once he realized it was a hit, he immediately invested. Within 48 hours, he had already tripled his investment.

Camillo said himself, when asked if he’s experienced failure by saying, “Yes, I still have difficulty today trading on my own information because it's hard to believe that an ordinary person can see something in their regular life that all of Wall Street hasn't picked up on yet. So some of my biggest regrets in the past have been not aggressively following my own instinct.”

Although investing may be a scary and risky process, Camillo has proved that by following the due diligence process, and a little bit of luck, anyone can invest prosperously.  

Investing

Source: http://blogs-images.forbes.com

• Briefly explain why you are interested in studying your topic:  

I am interested in this topic because the unpredictability of the stock market has always fascinated me. I have always questioned how it is possible that investors are highly profitable investing in the stock market. My fascination was furthered last year when I took a class called Investment Planning. This class allowed me to explore the field of investing and even play a game that allowed to invest fake money in the stock market.

• The overall question I plan on answering by the end of the project:   How can someone be prosperous while investing?

• Sub questions I will need to answer in order to answer the overall question:

What are some of the more safe and more risky ways to invest? I will need to analyze the countless numbers of ways that people help their money grow. From high risk penny stocks, to low risk savings accounts, I will look into all the different options to try and figure out what ways have the lowest risk as well as yield the highest amount of profit.

• My plan of research (what specific Library Databases, specific websites, names of authors, people, etc. will I pursue to find the answers to the questions above):

I will use recent articles and analyze investors that have been profitable such as Warren Buffet. I will not use as many database sources, however, I will use more current resources such as websites like CNN News, MSNBC, Forbes, Investopedia, and the Wall-Street Journal. My goal will be to find examples of how investors have had success investing as well as how they have experienced failure.

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