The most important thing in investing

The most important thing in investing

Every Mickey


Sunday, May 19, 2019

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Two investment questions spend a lot of time in my brain. One because I get asked it almost daily, [Is XYZ a good stock to buy?]; the other, I have never been asked before yet it would give the most value to anyone interested in investing. What is the most important part of investing? The first seems like a perfectly reasonable question (it is not). It seems that way because if you don't know much about stocks, then you are led to think that you should ask what stock “is good” and receive a neat answer you can just follow. It doesn't work quite that way in real life, it's a question that asks and implies so many more things than is immediately obvious. The thing is, once you understand investing and stocks, you'll understand how much more goes into a “simple” question like that. You'll also understand why you can't just answer it straight up — unless you don't care about the person.

Here's the breakdown. “Will XYZ go up?”

This implies that:

1. Know your financial goals and timelines.

2. Know how much money you're investing.

I can excuse the 2nd one, because unless you're working with millions, most people need high investment gains (higher than the bank's or Credit Union's rate of return). So, I can guesstimate a range of growth that you'll probably want no matter how large (or small) your money is. That leaves the obvious standout, your financial goals and timelines. Let me emphasize my next point.

So, “What does my goal have to do with whether or not XYZ is a good stock to buy?” Here's the explanation. Lots of stocks are good, in fact the vast majority of listed companies are good and will rise sooner or later. Over time, the market only moves upwards, and while this is a rule of thumb, it's one that has prevailed in markets all over the world (and JA) for literally centuries. However, your personal goals are the thing that will actually determine whether or not something is a good investment for your money.

Two people can ask, “Is Grace a good buy?” and the answer to one is, “yes” and to the other, “no”, and both answers still be correct.

Person A, might have a high paying job, live in a house they inherited and own fully and wanting to safely put away J$8M that they also inherited but don't really need for day-to-day life. They just want it to grow safely, give some returns, and be there for use in maybe 5 to 10 years. For them, maybe Grace is a great option. It's a huge company, which is unlikely to fail any time soon, and their profits, while large, don't grow very rapidly, and they pay a dividend of about 1-2% of your investment amount each year. This might be perfect for Person A's goals.

Person B however, has J$150,000, and lives hand-to-mouth off a very tight paycheque. They need money very quickly and they can't just put it away for 5-10 years and forget it. For this kind of person, Grace might be a terrible buy. They can't afford to put in the 150k, immediately lose about 3% (~$4,500) of it to fees. Then wait a year to make 7% (plus 2% dividends) on top of that. I would be doing them a disservice if I said, “Yes, Grace is a great buy.” Though Grace is a great buy, because I just told Person A that it was and I wasn't lying.

See, this is the real problem. “Whether Grace is (or any other listed company, or any investment for that matter) a “good buy” is actually a hidden, longer question.

“Based on my current financial standing, life goals, current obligations and timeline for achieving those goals and fulfilment of my obligations, will putting my money in Grace be the best decision to help me achieve them?”

Now obviously, I can't answer that question because I don't know your life goals, current obligations, timeline to achieve your goals, etc. Once you understand that, that “simple” question, isn't actually so simple, you start to see why I hesitate to answer.

So of course, I can't just complain, I have to suggest a fix. So next week, I'll be giving my fix and quick primer. Note: I'll be using the S.M.A.R.T (Specific, Measurable, Achievable, Relevant, Timely) template for these. Join me then to see how to get started on the most important step in investing, Goal Setting.

Randy is a strategy consultant and writer for . He still hasn't found a better goal than happiness.

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