Balancing Risk with Reward: 1 TIP for NEWBIEs
Since I made plenty of my share of mistakes in 2008....I think there is a theme to why I made those mistakes and why I no longer make them today.
TIP 1: IDENTIFY the REWARD.
If you tell me you are investing in X stock... or Y stock... I will say why?
And if you tell me.."Well....it's undervalued... share price is low.... low P/E....."
I will say.... wait wait... What is the reward for you buying shares of this stock?
And you might reply, "Well...share price will eventually trade higher! much higher! This one's got plenty of growth!! Look how cheap the stock price is!"
And I'll tell you that you are completely off base.... That attitude was Varchild2008 and it was wrong!!
Varchild2010 believes the Reward is not "Share Price will go up."
The Reward is actually..."Balance sheet Debt will go away due to recent acquisition that the company made along with progress in their most recent earnings reports in increasing income/profit/revenue."
BINGO!! The reward is a return to a ZERO DEBT Balance Sheet because of the acquisiton the company made.... and because of improved management performance.
I don't care about the stupid share prices anyhow.... I care about about the health of the company going forward and the recent track history report....
The whole business of "SHARE PRICE WILL GO UP" will just make you sell off your shares when it doesn't happen....and you may be selling a winner out of sheer frustration and impatience.
Sometimes share prices go sideways inspite of the fact the company's underlying business is going WAAAY up.
Great example in my own portfolio is a stock that bottomed in Q4 and basically traded sideways...highly undervalued... then finally an earnings report comes out and share price jumps up BIG.... Stock is trading up 10-13% year to date.
Look at (F) Ford... <------
Is Investing in FORD like I am invested in FORD..... Simply because you think the share price will go up????? Is that really the REWARD here?
Not for me.... I invest in FORD because of the Ford Fiesta, Ford Taurus, excellent management team and progress towards a ZERO DEBT Balance Sheet that was made in 2009.
Simply put... whatever the share price is TODAY is completely irrelevant to where it might be tomorrow... Stop focusing on what tomorrow will look like in terms of share price and focus instead on how their latest products are shaping up.
Best way to invest is "CHANNEL CHECKING" your investments by visiting the location of your company's products or business or dealerships or whatever...see if customers are just as excited about your company as you are investing in it.