While working on new posts this three-day weekend I realized that I have chosen all sorts of nuts-and-bolts investing topics without yet discussing my overall investment philosophy and approach. IPO’s, asset allocation, stock picking, these are all topics that I can’t write about without first providing an investment philosophy foundation.
What I invest in, what I avoid, and why I do it will be the subject of this post and the next. Then we can discuss investing practices and tactics; after theory comes practical application. Let’s talk about the principles and factors I consider when choosing what to invest in.
No Alphabet Soup
I want an investment that I can understand. This means I avoid exotic investment tools cooked up by fancy stock brokers. Options, futures, MBSs, and other members of the alphabet soup; these are all investment tools that my Business School professors tried to explain to me, but I never really understood. It seems that the more complicated an investment tool becomes, the easier it is for the stock broker to include fees without me noticing.
The recent real estate bubble is a good example of exotic investment tools gone haywire. Mortgage-Backed Securities (MBS) lose most of their value and Credit Default Swaps (CDS) can’t cover them. We all lose lots of money and few people understand why. Perhaps you understand these exotic investments, but a tool I don’t understand is one I can’t use or recommend.
Slow and Steady Wins the Race
Since I am investing for the long-term (more than 20 years) I want an investment that is tried and true, with a track record of steady performance. This means I avoid the “hot tips” given by stock pickers. Any time I come across articles such as “Top 10 Stocks for the New Year” or the like, I ignore them.
Investing magazines have to sell, so they often put these hot stock tips on the covers, with headlines such as “Top (insert number) Stocks to Watch for (insert year or sector)”. Some professional investors call this type of drivel “investment pornography” meaning it looks good but just leaves you (and your wallet) feeling empty. Tips like these may lead to short term gains, but I want to smooth out the ups and downs for a more steady return.
You Get What You Don’t Pay For
Fees over the long term can kill your investment return. Financial services (stock brokers) compete very handily with phone service providers as kings of hidden fees. When you step into the world of investing, fees are expertly camouflaged to look like anything but fees. A fee by any other name still stinks. Front-end loads, back-end loads, wrap accounts, 12b-1 charges…enough to make your head spin.
Which is exactly what your stock broker wants to do, so he can make you just that: broker. When it comes to investing, you cannot control your return (the stock market is inherently volatile) but you can control your costs by choosing wise investments. And among investment tools (mutual and index funds), there is a wide spectrum of fees and charges.
Where Do We Go From Here?
So there is a brief summary of my investment philosophy: tools (funds) that are easy to understand, grow slow and steady, and have the lowest fees possible. Using these principles, in the next post we will consider what to invest in and what to avoid.
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