7 Things My Mom Taught Me About Investing

When I was growing up my mother had a saying, or an answer, for just about everything…as do most mothers. Every answer to the question “Why?” was immediately met with the most intellectual of answers; “…because I said so”.

Seriously, my mother was a resource of knowledge that has served me well over the years and it wasn’t until late in life that I realized that she had taught me the basic principles to staying safe in the world of financial investments.

So, by imparting her secrets to you I may be violating some sacred circle of motherhood knowledge, but I felt it was worth the risk to share the knowledge which has stood well the test of time.

1) Don’t Run With Sharp Objects!

It wasn’t hard to understand why she didn’t want me to run with scissors through the house – I just think I did it early on just to watch her panic. However, later in life when I got my first apartment I ran through the entire place with a pair of scissors, left the front door open with the air conditioning on, and turned every light on in the house. That rebellion immediately stopped when I received my first electric bill.

Sometime in the early 90’s the financial markets became a casino as the internet age ignited a whole generation of stock market gamblers that thought they were investors. There is a huge difference between investing and speculating and knowing the difference is critical to overall success.

Investing is backed by a solid investment strategy with defined goals, an accumulation schedule, allocation analysis and, most importantly a defined sell strategy and risk management plan.

Speculation is nothing more than gambling. If you are buying the latest hot stock, chasing stocks that have already moved 100% or more, or just putting money in the market because you think that you “have to”, you are gambling.

The most important thing to understand about gambling is that success is a matter of understanding the probabilities and possibilities of winning or losing on each bet made.

In the stock market, investors continue play the possibilities instead of the probabilities. The trap comes with early success in speculative trading. Success breeds confidence, and confidence breeds ignorance.

Most speculative traders tend to “blow themselves up” because of early success in their speculative investing habits. The speculative trader generally fails to hedge against the random events that occur in the financial markets. This is turn results in the trader losing more money than they ever imagined possible.

When investing, remember that the odds of making a losing trade increase with the frequency of transactions being made. Just as running with a pair of scissors; do it often enough and eventually you could end up really hurting yourself. What separates a winning investor from a speculative gambler is the ability to admit and correct mistakes when they occur.

2) Look Both Ways Before You Cross The Street.

I grew up in small town so crossing the street wasn’t as dangerous as it is in the city. Nonetheless, I was yanked by the collar more than once as I started to bolt across the street seemingly as anxious to get to the other side as the chicken that we have all heard so much about. It is important to understand that traffic does flow in two directions and if you only look in one direction – sooner or later you are going to get hit.

A lot of people want to classify themselves as a “Bull” or a “Bear”. The smart investor doesn’t pick a side; he analyzes both sides to determine what the best course of action in the current market environment is most likely to be.

The problem with the proclamation of being a “bull” or a “bear” means that you are not analyzing the other side of the argument and that you become so confident in your position that you tend to forget that “the light at the end of the tunnel…just might be an oncoming train.”

It is an important part of your analysis, before you invest in the financial markets, to determine not only “where” but also “when” to invest your assets.

3) Always Wear Clean Underwear In Case You’re In An Accident

This was one of my favorite sayings from my mother because I always wondered about the rationality of it. I always figured that even if you are wearing clean underwear and you are in an accident; well, the first thing you do is say it, then you do it, and you’re still left without clean underwear.

The first rule of investing is: “You are only wrong – if you stay wrong”

However, being a smart investor means always being prepared in case of an accident. That means quite simply have a mechanism in place to protect you when you are wrong with an investment decision.

First of all you will notice that I said “when you are wrong” in the previous paragraph. You will make wrong decisions, in fact the majority of the decisions you will make in investing will most likely turn out wrong. However, it is cutting those wrong decisions short, and letting your right decisions continue to work, that will make you profitable over time.

Any person that tells you about all the winning trades he has made in the market – is either lying or he hasn’t blown up yet. One of the two will be true – 100% of the time.

Understanding the “risk versus reward” tradeoff of any investment is the beginning step to risk management in your portfolio. Knowing how to mitigate the risk of loss in your holdings is crucial to your long term survivability in the financial markets.

4) If Everyone Jumped Off The Cliff – Would You Do It Too?

I used to try with my Mom what every other kid in the world has tried to do since the beginning of time – the use of “peer pressure”. I figured if she wouldn’t let me do what I wanted to do then surely she would follow the masses. She never did.

One of the biggest mistakes that investors make today is chase stocks that are already overvalued and are running up on speculative fervor.

In the financial markets investors get sucked into buying stocks that have already moved significantly off their lows because they are afraid of missing the next great investment. This is speculating, gambling, guessing, hoping, praying – anything but investing. Generally, by the time the media alerts go up, you have already missed the major part of the move and the probabilities of a decline as investors start selling to the speculators greatly outweigh the possibility of further rewards.

It is a well-known fact that the market works in what is called a “herd mentality” which means that investors all tend to run in one direction at one time until that direction falters then they all run in another direction and so on.

This is also generally why investors wind up buying high and selling low. In order to be a long term successful investor you have to understand the herd mentality and use it to your benefit – which means getting out from in front of the herd before you are trampled.

So, before you chase a stock that has already moved 100% or more – try and find where the herd may move to next and invest your money there before the herd arrives. This is takes discipline, patience and a lot of homework – but you will be well rewarded for you efforts in the end.

5) Don’t Talk To Strangers

This is just good solid advice all the way around. Turn on the television anytime of the day and night and it is the “Stranger Parade of Malicious Intent”. I don’t know if it is just me or the fact the media only broadcast news that reveals the very depths of human sickness and depravity – but sometimes I have to wonder if we are not due for a planetary cleansing through divine intervention.

Back to investing – getting your stock tips from strangers is a sure way to lose money in the stock market. Your investing homework should NOT consist of a daily regimen of CNBC, followed by a dose of Grocer tips, capped off with a financial advisor sales pitch.

In order to be successful in the long run you have to understand the principals of investing and understand the investments that you are purchasing and what the catalysts are that will make the company profitable in the future. Remember, when you invest into a company you are buying a piece of that company and its business plan. You are placing your hard earned dollars into the belief that the management of the company has your best interests at heart and that they will operate in such a way to make your investment more valuable in the future so that you may sale your stake to someone else for a profit.

Also you need to be aware that when getting advice from the “One Minute Money Manager” crew on television – when an “expert” tells you about a company that you should buy – he already owns it – and most likely he will be selling his shares to you.

6) You Either Need To “Do It” (polite version) Or Get Off The Pot!

When I was growing up I hated to do my homework, which is ironic, since I now do more homework now than I ever dreamed of in my younger days. Since I did not like doing homework – school projects were almost never started until the night before they were due. I was the king of procrastination.

My Mom was always there to help, giving me a hand and an ear full of motherly advice, usually consisting of a lot of “because I told you so…”

I find it interesting that a lot of investors tend to watch stocks for a very long period of time – never acting on their analysis – just idly watching as their instinct for a particular equity proves to be right and the stock begins to rise in price.

The investor then feels that he missed his entry point and decides to wait hoping the stock will go back down one more time so that he can get in. The stock continues to rise – and the investor continues to watch becoming more and more frustrated with the rise in price until he finally capitulates to his emotion and buys the investment near the top of the stock’s recent move.

Procrastination – on the way up and on the way down – are harbingers of emotional duress derived from loss of opportunity or the destruction of capital.

However, if you do your homework and can build a case for the purchase, don’t procrastinate. If you miss your opportunity for the right entry into the position – don’t chase it. Leave it alone and come back another day when ole’ Bob Barker is telling you – “The Price Is Right.”

7) Don’t Play With It – You’ll Go Blind

Well…do I really need to go into this one? All I know for sure is that I am not blind today. What I will never is know for sure is whether she believed it; or if was just meant to scare the hell out of me growing up.

When you invest into the financial markets it is very easy to lose sight of what your intentions were in the first place. Getting caught up in the hype, getting sucked in by the emotions of fear and greed and generally just getting confused by the multitude of options available to you cause you to lose your focus on the very basic principle that you started with which was to grow your small pile of money into a much larger one.

My Dad once taught me a very basic principle: KISS: Keep It Simple Stupid

This is the one of the best investment lessons you will ever receive. Too many people try to outsmart the market to gain a very small, fractional, increase in return. However, at the same time they wind up taking on a disproportionate amount of risk which, more often than not, leads to negative results. The simpler the strategy is the better the returns tend to be. Why? There is better control over the portfolio.

Designing a KISS portfolio strategy will help ensure that you don’t get blinded by continually playing with your portfolio and losing sight of what your original goals were in the first place.

1. 1)Decide what your objective is: Retirement, College, House, etc.
2. 2)Define a time frame to achieve your goal.
3. 3)Determine how much money you can “realistically” put toward your goal each month.
4. 4)Calculate the amount of return needed to reach your goal based upon your starting principal, the number of years to your goal and your monthly contributions.
5. 5)Break down your goal into milestones that are achievable. These milestones could be quarterly, semi-annual or annual and will help make sure that you are on track to meet your objective.
6. 6)Select the appropriate asset mix that achieves your required results without taking on excess risk that could lead to greater losses than planned for.
7. 7)Develop and implement a specific strategy to sell positions in the event of random market events or unexpected market downturns.
8. 8)If this is more than you know how to do – hire a professional who understands basic portfolio and risk management.

Conclusion:

Most people who are investing in the markets have only experienced the great bull market of the 80’s and 90’s. The markets of the 21^st century may prove to be a much tougher investing environment than most investors realize.

Economics, politics, and the general world around us all play a very important part in the future value of your money. However, as you manage your money, ask yourself the following question, and often: “Would a professional money manager make this decision”.

There is obviously a lot more to managing your own portfolio than just the principles that we learned from our Mothers. However, this is a start in the right direction and if you don’t believe me – ask your Mother.