Investor — Know thyself

This sounds so simple, yet most us have not clearly articulated our real investment objective. Are we seeking growth from investment assets or income? Successful investors know exactly what their investment goals are. They can write out these goals on the back of a napkin. They are that sure of their goals. Typically, they can explain them to a complete stranger in less than two minutes. Think of the most successful investors you know. You will find individuals who have focused on what they want to accomplish. Let’s take the case of the real estate developer who knows his investment objective. He may be seeking parcels of land at an attractive price that could be re-zoned and sold for a much higher price. Perhaps he selected raw land and made added improvements such as water and sewage facilities. These improvements usually increase the underlying value of the land dramatically. In another case, a developer took inexpensive land and built homes on this property. She made a dramatic profit from the land value increasing in addition to a fair sum from the new house construction. Many value-oriented stock investors know what they are seeking. Perhaps they will look for company shares that are trading at a deep discount to their potential value. These investors put the adage of buy low and sell high to work for themselves. Simply by keeping an open mind and an open eye on the marketplace, they can find countless stock opportunities in the course of each month.

In each of these cases, these investors have decided on an investment strategy and then put it to work. These investors have focused on a set strategy for investing. They have their investment objectives and are working toward making their goals a reality. Whatever your method of investing, it helps to clarify your goals. Set out what you want to accomplish on paper and decide how you wish to measure your progress. This simple exercise is what sets the successful investors apart from the multitude of others. This simple routine of establishing your objectives and keeping track of your progress is what separates the wealthy from the average person. You must first know what you are trying to accomplish so you may profit from the lessons that are to be learnt in the pursuit of your endeavours. Not only will knowing your objectives increase your knowledge in specific areas, but you will become much more immune to the negative thought processes that abound in the world today. Many people start off on the right track only to become easily persuaded to abandon their plans due to self-doubt. These precursors to self-doubt can originate from many different sources.

The most common are:
* The news media. Most news sources are just reporting news events. The shows and publications that report on actual financial topics are forced to report on such topics each and every month. They inadvertently make financial topics confusing by writing about them from too many viewpoints, with every writer’s opinion coming across as some sort of fact. Remember, these media sources have to publish often. They may research a story for only a few days before they go to print or to film. This knowledge alone should make you cautious.
* Other investors. If all your friends are investing in conglomerates or manufacturing companies, chances are you will consider that avenue of investment as well. Likewise, if most of your fellow investors are investing in government bonds, you will possibly be looking at this type of investment. Another example is when home buyers purchase their homes with a 20-year mortgage because that is what the majority of people are doing. Most of these home buyers ignore the shorter 10-year note and do not even know that there are 15-year mortgages as well. People of all ages seem to act in a manner that is typical of their times. Some of this is the result of traditions, customs, and current trends that people assume are the right and only way to proceed.

Typically, when the majority of Trinidadians are investing in the stock market, the group talk is what dictates your investments. The group thinking is that there is safety in numbers. A saying that has been said many times, bears repeating: “Just because everybody is doing it, doesn’t make it right.” This lesson was driven home during the 1990s when investors who were used to having high time deposit returns kept trying to squeeze every last dime from their accounts. They were doing this at a time when the stock market was just starting to take off. These bank investors missed out on one of the longest rallies on the TTSE ever. Most of these investors took over ten years to finally start entering the stock market. After taking all of these questions into consideration, you may come to the conclusion that perhaps you are not only investing for income, but maybe you need to emphasise growth as well. Only when you evaluate your objectives will you start to realise how complicated real investing can become. A good relationship with an experienced Financial Planner or Investment Advisor could assist you greatly with these and many other questions that will confront you. Best of all, they could bring to your attention many questions that you have not even thought of asking.

Determine Your Time Horizon

Serious investors know their true time line. Many of today’s investors get involved in investments that they are not prepared to hold on to for the long haul. As such, they will be tempted to sell those investments, either when they rise rapidly in price or when they drop in price. Had those investors really known their true time horizon, they would have been more inclined to hold to their original strategies. Knowing your time horizon will allow you to articulate what strategy you should be pursuing. In doing this, you will also develop the ability to stick with your financial programme for the long-term. This will more than likely give you the real results you are seeking. Knowing your true time line will require that you evaluate what you are trying to accomplish both in the short term and long term. A prime example would be someone in their mid-50s saving for retirement at age 65 and assuming that their goal is roughly a ten-year goal.  Upon further reflection, they may realise that their true goal is to save for retirement at age 65 and to ensure that they can stay retired. They might also realise that they need to keep up with the rising costs of inflation. Considering that an average person in his mid-50s is expected to live for another 30 years, he may now realise his goal is quite a longer term. Be careful when evaluating your goals and selecting your real time horizon. The influence it will have on your portfolio composition can be dramatic. Short-term investors are known to favour low volatility over higher returns.  Therefore, a short-term investor would have a much higher tendency to go with bonds or money market instruments instead of equities.     
(To be continued next week)