INVESTING WITH CLARITY™ BLOG
Do You Know What You Own And Why?
April 3, 2013 11:43:00 AM
An investment in knowledge pays the best interest. - Benjamin Franklin
In the complex world of investing, it is often difficult to explain many of the mechanics which go into the investment process.
For example, as a portfolio manager and investor, I keep at the core of my investment philosophy the fundamental premise, Know what you own and why you own it.
To me, knowing what you own and why provides an investor a level of greater clarity many investors do not own in their investment portfolio.
In other words, if you are going to invest, you should think like a business owner. Why? Because owners of businesses have great knowledge of what they own and why they own it, including a long-term investment time horizon-typically three years or longer.
If you are going to invest in companies through the stock market (whether directly or through mutual funds and ETFs), then I believe you must think like a business owner. This means you should at least have the ability to know what you own and why you own it if you choose.
Or, if you work with a Financial Advisor like many investors do, you should at least have the ability to discuss what companies you are invested in (and why) with your Advisor. Hopefully, they know what you own!
Why Is It Important to Know What You Own and Why You Own It?
There are several reasons this knowledge is so important.
First: business owners are used to the ups and downs of their business. Economies expand and contract over time. However, well-run companies with great products and services will continue to grow over time.
When a business owner's business goes through a downturn, do they sell their business and hope to buy it back at a cheaper price down the road? Of course not! Rather, in difficult times they continue to invest in their business for future growth-a tactic of a long-term thinker!
However, it has been my experience that when markets are in a short-term correction or economies are in a period of contraction, many investors have a tendency to become emotionally connected to the short-term noise. Many investors revert to attempting to time the market by selling their investments with the hope of buying them back at cheaper price.
Other investors give up on investing in the stock market indefinitely or move their investments to another investment manager who's historical returns give the investor a sense of comfort they will achieve similar success in the future.
All three scenarios are unfortunate. As statistics and history have clearly taught us, investors who attempt to ime the market routinely under-perform he market.
Investors who pull out of the equities markets risk missing out on great investment opportunities for the longer term, effectively choosing to hold cash instead.
And lastly, has historical data has shown, investors who chase historical returns have been left with the disappointment that the future returns they achieved did not meet the expectations of the investor.
Second: it is my belief that the more you know about what you own and why, the less likely you will be to get emotionally attached to short-term noise or stock market corrections. Instead, as an investor who knows what you own and why, you will look at stock market corrections and economic slowdowns as opportunities to buy businesses on sale-to strategically cost average into the companies you want to buy. This tactic is similar to how a business owner behaves.
So, the question an investor must ask is this: If I invest in the stock of a company, do I own a part of the business?
The answer is, Absolutely! That makes you a business owner!
Therefore, are you going to invest like a business owner (a proven, long-term strategy to wealth creation for many people)? Or, are you going to be someone who guesses at what is going to happen because you do not have the clarity of knowing what you own and why you own it?
Invest With Clarity!
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