One of the questions I receive on a regular basis from friends, family, and readers is how to invest. The problem is that the media has presented investing as something of a circus. How so? Well, at a circus there are rides, food, and clowns all over the place. Everything is trying to grab your attention while simultaneously emptying your pockets. The media presentation of investing is very similar. Everything is about what’s happening, how exciting it is, and, of course, what stocks are hot. However, once we cut through the noise, investing can be a relatively simple, mechanical process.
I know nothing . . . Repeat that. And now one more time.
The reality is that as investors, most of us know nothing about financial markets. I know nothing. You know nothing. We all know nothing. It’s almost like a catchy song. There are some market participants (think investment bankers) who do happen to have information about financial markets. Those individuals are called professionals and they have information that we’ll have access to AFTER it matters.
Some investors will devote a significant amount of time to understanding “why” things are happening. Don’t do that. I suppose you can if you want, but it isn’t an essential part of making money. People make money in the markets because they own something that appreciates in value. They then sell the appreciated item for more money. Boom, that’s all it takes to become a successful investor! Is it easy? No.
While becoming a successful investor isn’t easy, it isn’t that we don’t understand what’s going on in the markets. Rather it’s that we don’t have a plan, don’t know what to do, and/or spend an inordinate amount of time trying to understand why prices are moving and things are happening. However, what if you could become a successful investor by completely ignoring “why” things are happening and instead focusing on understanding what “is” happening? That’s where we’re going next.
Systematic Investing and Ignoring Noise
Systematic Investing is a fancy way of saying that there’s a pre-defined process for the investment decisions we’re making. That means there’s a plan. However, my belief is that Systematic Investing should also be empirically valid. In other words, we should be able to prove that our methods for investing work over time and across various market conditions.
The only way to know that an investing system works across various market conditions is to test the system. Most investors never test an idea and instead end up making decisions based on a number of outside criteria. The point is that as investors it’s in our best interest to validate ALL ideas before committing money to them. If we don’t do that, we’re gambling and hoping for the best.
But, what if you don’t know how?
That’s where the “How Should I Invest Series” and this blog comes in. The series is a starting point for both understanding investing and putting together a plan for investing. My goal is to write the series in an easy to understand format while also providing actionable information. If something is unclear, feel free to post comments below.
In the next post we’re going to talk about the most powerful force in investing and you can rest assured that it’s not watching CNBC. Click here to read Part 2 . . .
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