The market can be unpredictable. In 2008 Fannie Mae was deemed unworthy of existing, and then in 2013 the stock price increased by nearly 1,000%. While hindsight would allow us to tell ourselves, ‘the mortgage market is doing very well and the share price was $0.27, so of course it had a great year,’ we must live in the present.
The important thing to know when it comes to the stock market is not only what to put your money in, but just how to invest in stocks. Among the important aspects are to invest in what you know and to not get emotional about a stock just because it goes up or down.
Invest in What you Know
For the purpose of this article we interviewed Christopher Pascale, the Chief Financial Officer (CFO) of Portfolios With Purpose. The interview was very interesting, but when it was over he referred us to two pieces he had contributed to the site The Untrained Housewife.
The first one we reviewed discusses his father’s advice to him at the age of 12. His father taught him to invest in things that people need and in companies with products he liked.
The reason is because if you like something you’ll not only to believe in it, but also want to learn more about it. For instance, a Seventh Day Adventist would be foolish to invest in an energy drink company, but a mechanic may have some good insight into investing in the auto industry.
When Warren Buffett did not get involved in the tech craze during the late 1990’s, people criticized him and believed he was a relic of the past, but then came 2001. While people were riding the wave, he was watching from the shore witnessing the crash.
Don’t let Your Emotions Control you
The second article Mr. Pascale referred us to discuss some bad losses he took from 2003-2008 – equal to a year’s income.
Part of the reason he’d lost so much was because he was not following the first rule. He started investing in energy companies, and then a modeling agency based on press releases!
The press releases briefly brought in an influx of cash from people like him, which drove the stock up. To quote him, he “didn’t want to miss the wave,” so he put everything he had into these companies, liquidating shares of companies he knew very well.
They were hard lessons, but he learned them at a young age and has since recovered. By following these rules you can avoid the personal experience of these lessons and protect yourself and your assets when investing in the stock market.