In Your Face

In Your Face
Thought provoking opinions on topical issues.

Wednesday, March 03, 2004

A Simple Guide to Investing

I have been reading the posts on one of the threads of a bulletin board, hosted by a popular UK financial website, with interest and alarm over the past few weeks.

The thread relates to a company that listed in the last year. The shares of the company have enjoyed a dramatic 3000% rise in value over this period.

Needless to say, the thread relating to this company has been very active as of late; as more people are drawn in by the idea of making a "fast buck".

There are a number of people posting on this thread who, by the grace of God, seem to feel that they have been gifted with second sight.

They routinely, via goat's entrails and runes (I assume), make bold predictions as to the upward price movement that they expect the stock to make over the coming days. In the last fortnight or so, as the speculative bubble begins to burst, these predictions have been wrong.

The price has started to dip, and there are a number of "investors" who (I suspect bought in at much higher levels) will get their fingers "badly burnt".

This is a more extreme example of the daily ebb and flow of share prices around the world. However, it serves to highlight a number of common characteristics of some "investors" and the "techniques" that they apply when investing money in companies:

  • It is apparent that many of the investors in this share have not the slightest understanding, or knowledge, about the company or the industry in which it operates.

  • The slightest hint of positive news concerning the company, or its area of operations, is seized upon as an omen that the stock will double in value.

  • Individuals who post warnings about the risks involved are shouted down with vitriol, and denounced as "de-rampers" (people who deliberately seek to drive down a share price, in the hope of making money).

  • Certain posts pertaining to contain "facts" and information are, at best, dubious and worst dishonest.

  • The average investor appears to have a limited time horizon, extending no further than 2 weeks. This is usually the length of time that they have to pay for the shares that they have purchased.

  • The desperation to make a "fast buck" suggests that some are in serious financial difficulties.

  • The atmosphere on this bulletin board is more akin to a casino or racetrack, rather than an investors?f discussion forum.

  • In short it is apparent that these people have not a clue about what they are doing. They are no better than an ill informed, and reckless, gambler staking all on the spin of a roulette wheel.

    My advice, for what it is worth, to those seeking to invest in companies is as follows:

  • Never make any investment without consulting a suitably qualified independent financial adviser.

  • Never invest what you cannot afford to lose. Investments can go down as well as up!

  • Do not put all of your eggs in one basket; spread the risk.

  • Never invest for short-term gain. Life is full of uncertainties; you must assume that you may have to hold for two or more years before seeing a decent return.

  • Be prepared to cut your losses and sell, before you lose everything.

  • Research, research, research; learn all there is to know about the company, and industry in which it is operating in, before you part with any of your hard earned money.

  • Test your investment policy first, before putting down hard cash; see if you really do know what you are doing.

  • Note that this advice is based purely on my own opinions, observations and experience. It is not exhaustive, and should not be used solely as a basis for any investments that you may be considering to make in the future.

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