What do you need to know when your investing thousand, perhaps hundreds of thousands of dollars in a stock? Well, in the astute words of the smart real estate investor, philanthropist, author of many books, such as "The Action Principles," and world renowned martial artists, Bill Fitzpatrick, you need to "Know Everything." Before you buy a single share, before you purchase that investment property, you need to know everything there is to know that might influence that investment. Otherwise it's a fool's gambit.
You need to know the company behind the stock, its products and competitors. You need to have an acute and tacit knowledge of the industry, sector and market conditions that will likely influence investor sentiment. You must know how to analyze the fundamentals of this company, as well as the fundamentals of the market and industry it belongs to. You need to be a skilled chartist to perform technical analysis of the stock and markets to understand resistance and support levels, price/volume momentum, contrarian indicators, patterns, and much more.
Believe it or not most investors go long or short on a stock based on their feeling that it is likely to go their way after they purchase that stock. Let's be honest, there are some people in this world that have extraordinary capabilities that allow them to see things that others simply cannot, these people are called savants. Savants are learned, distinguished professionals that have earned their spot through hard work and innate brilliance, then there are the idiot savant like rain man, who are mostly good at just remembering stuff, not very good at analyzing and predicting. Then there's Marilyn Vos Savant, she's just brilliant and a looker to boot!
So, the one piece of advice that I would impart onto you before making any investment decision, the mainstay of my investing philosophy, that would be, know everything. Once you know everything, then you need to develop a plan, a strategy for entering into the investment, and a strategy for managing it while you are a holder, and a strategy for exiting the investment. This process is not stagnant either, it a free flowing, more artful than mechanical. You might do well to read The Art of War, by Sun Tzu to gain a full appreciation, as many a business men and investors have found applicable wisdom in it. Investing is not unlike what the general must do in preparation for battle. And like battle, you never know what the enemy (market forces) is going to do, so in all likelihood, your plan will change. This means that you must have a strategy the is adaptable.
I'll finish this segment with a look at what the plan looks like and a definition of the key parts. Every trade you make should have the following components:
- Entry - the price you should try to get within a defined range.
- Target - the price you have determined to be the upside potential to be.
- Stop - the price you should sell at (usually on a closing basis, sometimes intra session) if it falls below the Entry.
- Risk - a factor (low, medium, high) that assesses the chance that the stock will achieve the Target price
In future installments of "The Zach Bass Investment Philosophy," I'll go into more detail on developing the strategy and methods of analysis. And Ill make the distinction between managing in-and-out trades, versus managing a long term trade like APPL.
-zach bass
