Tags: invest | fundamentals | company | value

The Enemy of the Investor

By    |   Monday, 14 Apr 2014 07:48 AM

The road of investing has many sideshow distractions that can get you off track if you're not careful. The novice will get so focused on these distractions that they'll lose focus on what really matters.

So today, I want to talk about one of these distractions, because it really ends up becoming your enemy as it attempts to work against you.

Our biggest and most important enemy is ourselves . . . specifically, our emotions. We're such emotional creatures. But the problem is that when we mix emotions with decision making, we usually mess up.

Also, our emotions aren't consistent enough for anything important. What if you only loved your kids on the days when you felt like it or when you felt like they deserved it? That would be a pretty fickle relationship wouldn't it?

What if you stayed with your spouse on the days when you felt like it and you didn't on the days when you didn't feel like it? Well, you wouldn't have much of a relationship would you? In fact, given enough time, you wouldn't have ANY relationship with your kids or your spouse.

We can see how obvious it would be to make our decisions based on temporary emotions/feelings when it comes to important things like our relationships. But we need to also see it the same way when it comes to our investing, which is also very important. This is where many investors get it wrong and really sabotage their investments. They end up laying a trap for themselves and then they fall into it.

You see, when emotions get in your way the most is not when your stock is going up, but it's mainly when it's going down or when its treading water for a while and it's taking longer than you'd like for your stock to appreciate.

This is when investors start to mess up by doubting themselves, doubting the company they bought and even doubting their system for assessing stocks.

But here are the facts. When you buy a stock, you're not likely to "call a bottom" in the stock. In other words, it's not likely that you're going to buy it and it go straight up from there. Yet, some people mentally set themselves up for that unrealistic scenario.

Additionally, when you sell, you're not likely going to "call the top" on the stock either. So that means, when you take profits, the stock may still rise for a bit longer. Don't get ticked over that! That's called "real life" investing.

So how do you effectively combat the emotional swings when investing? You keep your focus on your system that assesses the actual company that you've bought.

I do this by assessing the fundamentals of a company. By looking at its financial condition, I can see how large the company is, how much cash it has on its books, how much debt it carries, etc. By assessing things like this, I can assess if I've got a good candidate for a stock purchase. In other words, it tells me how solid the company is financially.

If it's a huge company with deep pockets and low debt levels, then I know it is sound and I can have faith in that company.

From there, it's a matter of finding out if that sound company is cheap or expensive. In other words, "any day" is not the day to buy a good company. The day to buy a good company is when it's priced cheap fundamentally.

You can assess that by comparing the company's stock price with its earnings via its price-earnings (P/E) ratio. You can also compare the stock's price with its net assets by looking at its price-book (P/B) ratio.

If you buy solid companies when their P/Es and P/Bs are historically low, then you know you're buying the company at a value. In other words, it's undervalued. But remember, many undervalued companies can sink a good bit more and become even more undervalued before they turn around and rise. This is where you have to have patience and faith in your system.

For instance, since launching the Ultimate Wealth Report around two years ago, I've sold 10 of our stock positions for an average return of more than 28 percent. Sounds great doesn't it? However, what you may not realize is that after I bought some of these companies at undervalued levels, they sunk some more before finally bottoming and turning higher.

These companies could sink another 10 to 20 percent before turning around and making up that floating loss and then tacking on an additional 28 percent on top of that.

So how did I keep my focus and not let the enemy of my emotions get to me? I kept my focus where it should be: on the fundamental condition of the actual company. This allowed me to remain focused and not pull the rug out from under myself. Instead it allowed me to capture great gains for my subscribers.

You see, if the stock sunk, I'd simply go back to its balance sheet. If it was still just as solid and still a great value, then I knew I just needed to have patience.

Good companies that trade at cheap, undervalued prices won't stay that way forever. But sometimes it may take some months or so before the turnaround happens. That's why I tell my subscribers to be true investors and be willing to remain in a stock position for at least 12 to 18 months.

Some of our stocks reaped huge gains in four to six months. But many of them took 12 to 18 months (one took almost two years). But did I mind? No! Why? We made more than 28 percent by buying huge, solid companies on the cheap. In other words, in order to get these returns, we didn't have to become super speculative and buy high-risk stocks.

We bought industry leaders, world dominators at cheap prices and then used a bit of patience. We invested in multi-billion dollar companies that make billions of dollars per year and have billions of dollars of cash on their books and manageable debt levels.

So I don't have to fear the companies going under that are in that kind of financial shape. All I have to do is ensure that I've bought them undervalued and simply sit back and wait for the market to recognize this state of undervaluation as it re-prices the stock up to a fair value (or even overvalued in most cases).

By knowing the quality of the company that you've bought and the discounted price that you've bought it at, it allows you to have confidence along the way while you wait for your payday on the stock.

Therefore, don't sit there and watch every movement on the stock chart. And certainly don't stay glued to every headline that comes out. Any of that can take your focus away. Instead, keep your focus where it needs to be and you'll find that you fare much better in your investing.

God bless!

About the Author: Sean Hyman
Sean Hyman is a member of the Moneynews Financial Brain Trust.
Click Here to read more of his articles. He is also the editor of Ultimate Wealth Report. Discover more by Clicking Here Now.

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SeanHyman
The road of investing has many sideshow distractions that can get you off track if you're not careful. The novice will get so focused on these distractions that they'll lose focus on what really matters.
invest, fundamentals, company, value
1222
2014-48-14
Monday, 14 Apr 2014 07:48 AM
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