One of the fundamental rules of becoming rich or richer is to buy low and sell high. Makes sense doesn’t it? When you buy something at a good price and sell it for a higher price, you are left with a tidy profit. Some things can be turned over very quickly while you may need to hold others for longer until the overall market appreciates.
Since we are currently living in a time of great turmoil I am reminded that the art of investment can be likened to the basic strategies of fighting a war. There are three fundamental strategies of fighting a war – to advance, to lay low and observe and to retreat. All have their place as part of a greater strategy and all are important elements in ultimately winning in battle.
I often receive calls from people who have just finished reading one of my books or have completed one of my investment education courses and they are anxious to get into the market as quickly as possible. I certainly encourage enthusiasm and admire courage. I also know and teach that it is important to take action, otherwise nothing will change.
Before jumping in boots and all however, it is important to assess the market and form an opinion as to where you think it is headed. You need to decide whether the market is undervalued and has good upside potential (and how soon it can be expected to move upward) or whether it is at full value with little upside potential at present. Alternatively, the market may be overvalued and at risk of declining soon. Each type of market calls for a different response from the investor regardless of their enthusiasm, desire and urgency to invest.
In the same way that a soldier does not advance regardless of the circumstances of the battle, we as investors need to think and act strategically if we do not want to end up as shark bait and lose our money.
Sometimes the best strategy for an investor is to retreat from the market by selling down or selling out altogether. This may be the case if the market is very high or if the market is on the verge of a collapse. At other times the best strategy may be just to sit tight and observe. When the market is undervalued with good upside potential, - that’s the time to advance and take your positions.
Flamboyant stockbroker, Rene Rivkin was interviewed a while ago and was asked why he was selling out of the sharemarket at the time and putting his money in the bank instead. He explained that the preservation of one’s capital base is as important as making a profit or getting a good return on your funds. He said that he would rather earn 3% - 4% by having his money invested in the bank and preserving his capital than leaving it in the market and possibly losing 20% - 30% of his capital base through a downturn in the market. Rivkin has had a bearish view of the market for some time now and therefore retreated to await more buying opportunities. As soon as he discovers those opportunities he advances again.
Many investors were wary of the effect that the introduction of the GST might have had on their investment strategies. Some waited and watched while others plunged in to position themselves before the replacement costs of assets increased. It all depends on their perceptions of where they feel the market is headed.
Some people put forward the argument that it is always a good time to invest, regardless of the circumstances. I found that these people are often salespeople who have a vested interest in the promotion of their product rather than successful investors. Property salespeople use the old argument of position, position, position while stockbrokers and financial planners promote dollar cost averaging.
They say that since it is almost impossible to pick the bottom of the market (except with the benefit of hindsight), you should invest regularly, regardless of where the market is headed. They say that in the long term the acquisition costs of your investments will average out since some assets will be bought in a rising market and others will be bought in a falling market. The comfort for this argument is that it is easy to follow and does not require any knowledge of investment principles or market conditions. It’s also supported by the old idea of “putting your shares in the bottom drawer and forgetting about them.” I contend that these strategies worked in the past but should be reconsidered in the light of changing market circumstances.
These days it is important to be vigilant and to be much more aware of market conditions if you don’t want to end up as shark bait. Don’t just rush in without first assessing the market. Also don’t simply believe everything you are told. Investigate, analyse and confirm that the person giving you information is also applying it successfully themselves. Be willing to take action and move forward when it is appropriate. At other times, be willing to stop and observe and possibly to wait. When you think the market is due for a correction, be prepared to sell and take a profit. Remember always – buy low, sell high!
About Hans Jakobi
Hans Jakobi is an educator, author and public speaker. He is the author of six best-selling books including,
Super Secrets® to Wealth do-it-yourself real estate investment home study course.
His educational materials are available from: Wealth Dynamics International Pty Ltd, PO Box 167 Portland NSW 2847 Australia
Telephone: (02) 63 555 800 Fax: (02) 63 555 855 Email: wealth@supersecrets.com
Website:
www.supersecrets.com
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