Multi-Unit Franchisee Magazine Issue IV, 2013 | Page 76

InvestmentInsights
By Carol M. Schleif

Stick to Your Principles!
9 tips for maintaining balance in your investments

A

few months ago, the Wall Street
Journal ran a front-page story
detailing how it’s legal for
nongovernmental providers
of key data series, such as the University
of Michigan Consumer Sentiment poll or
the Purchasing Managers’ Index, to release
customer research reports early to those
willing to pay for it.
Research reports can move markets, and
those who get the business intelligence in
advance can make millions from receiving
this information early. What’s striking is
that the early information is received seconds before public release—not minutes,
hours, or days—and they’re still profiting mightily.
This phenomenon is not unlike what’s
happened in the investment business over
the past several decades. Daily trading
activity today seems to be dominated by
those with hundreds of billions in assets
under management, computer-based trading systems, and media-induced “noise”;
even as the average time between an asset’s purchase and sale has shrunk from a
couple of years to a couple of months. So
what’s the individual investor to do without those advantages? The right mindset
and these key investment principles might
help level the playing field.
1. Do your homework (or hire someone who does theirs). Investing takes hard
work, diligence, and time. Some people love
doing it themselves, and ample resources
are available today to help. However, it’s
unreasonable to think you can spend a few
hours uncovering some gem that a highly
educated professional armed with analysts
and a supercomputer hasn’t already found.
If you don’t have that amount of time or
energy to devote to the activity, hire a firm
with a time-tested and thorough due diligence process for picking their asset classes
and specific investments.
2. Know yourself. Do your research, but
test your theories with others. Behavioral

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Multi-Unit Franchisee Iss ue I V, 2013

finance has documented many different
ways that we are wooed into making faulty
investment decisions. Debating others on
investment ideas is crucial and can lead to
better and more consistent results, whether
your investing is self-directed or done by
a financial advisor.
3. Valuation matters. The best fundamental research is useless if you don’t pay
attention to how over- or under-priced an
asset is. The basic concept in investing is
to purchase at a discount to what you have
calculated the long-term ultimate value
is, and then sell when that valuation has
been reached or exceeded (or when fundamentals break down). Sounds simple,
but many individual investors often get
swept up into wanting to buy an asset
because it’s going up, not because they
understand how the current price relates
to the intrinsic value.
4. Focus on returns, not prices. Almost any asset has a clearing price on any
given day (the monetary value determined
by the give and take of the market’s bidand-ask process). In the past few years, as
banks in developing markets have shed