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Chapter 2
- Fundamental Rules of Investing
Before you fully appreciate this plan and put it to maximal use,
you must understand some fundamental concepts of "successful
investing." Successful
investing does not include such things as winning a lottery or a lucky
pick of a stock or mutual fund, whether you or your broker chose it.
Even in the case where you chose a stock, futures commodity, or
whatever, based on a trend or some set of indicators, it is still a
stroke of luck if you make even a moderate profit over the short term
since these securities depend on so many things, including the emotions
of the masses.
You
Must Have Control:
To be a successful investor, you must have significant amount of
control over your investment. To
illustrate this point, consider buying shares of a specific stock versus
buying shares of a mutual fund (mutual funds are discussed in more
detail in appendix F). Assume
you owned shares in a mutual fund and the whole market drops 100 points.
As a result the value of your shares drops as well.
You have two choices: (1)
Sell at a loss, or (2) wait it out.
If you decide to ride out this swing in value and hold your
shares, two forces are working against you.
First, many shareholders will make the emotional decision to sell
which decreases the demand for the shares and hence decreases the value
further. Furthermore, the
fund manager is under a great deal of pressure to sustain a decent rate
of return for his fund. So,
he may sell the stocks that dropped in value, throwing away the chance
that the stock values may recover. If
you had purchased the stock directly, then you could analyze the
situation and decide if you wanted to sell at a loss or wait for a
recovery by holding onto it. Clearly,
in this case, you have more control even though you still do not have
control of the overall economy and stock market.
Of course, in exchange for this control, you have to invest your
time to select the stock and then monitor its performance.
Every investment specified in this plan gives you a much greater
degree of control than any of the investments mentioned thus far.
Diversify:
If you choose to violate the rule "to invest only in
investments in which you have a high degree of control," then you
must rely on diversification to protect you against the risk of changes
in the economy. For example,
you need to have a mixture of stocks for capital growth;
stocks, bonds, and/or CDs for income; bonds for protection
against falling interest rates; commodities, such as gold and silver or
real estate, as a hedge against inflation; cash securities for
liquidity; etc. In addition,
how you should proportion your assets among these categories changes
with your age, working status, and comfort level of risk.
As you can see, this can get very complicated, and there are no
guarantees. Since this book
only recommends investments for which you maintain control,
diversification among these types of investments will not be discussed
in great detail in this book.
Though diversification is important for protection, there are
many disadvantages in diversifying.
As previously mentioned, it can get very complicated when you
consider that you have to choose the best mix of investments for you and
your situation, carefully make intelligent choices of the securities you
buy, and then consistently monitor them.
Furthermore, you can not make a lot of money quickly or even
consistently, unless you have a lot to invest in the first place or you
are willing to borrow a lot of money.
In fact, many of the categories tend to oppose one-another.
As one category increases in value as a response to the economy,
another loses some of its value. Moreover,
with a mediocre performance at best, it is easy for the busy middle
class worker to lose interest and not invest or track his investments
consistently. Finally, it
may become too complex and detailed
for the busy middle class worker to track his investments at all.
If you choose an investment(s) for which you have enough control,
you can afford to relax the need for diversification to a certain
extent. Thus, by
concentrating your time, attention, and resources on one or two things
you can control, you will realize several benefits.
First, you reap rewards much faster than trying to build in
several different directions at once.
For example, if you
have
ten things to do in one day, should you try to do everything at the same
time? Of course not!
It is much more efficient to prioritize all ten tasks, and
completely finish the highest priority task first.
Then complete the second task, then the third, etc.
For this strategy, this book has prioritized your investments for
you. The Stoker Strategy
identifies the tasks, puts them in order, and shows you how to determine
the schedule for the completion of the task.
Essentially, this plan has laid out a pathway to a better life,
at least financially, for you. Furthermore,
since you will have a great deal of control in whether you succeed or
not in each investment, it is not likely that you will lose interest in
your investment. You only
need to maintain a bit of discipline.
In fact, the first major investment is the hardest to complete;
once you get through it, the follow-on investments could be put
on auto-pilot more or less. To
summarize, by using the Stoker Strategy, you can afford to put all your
eggs in one basket. Then
hold onto that basket with both hands.
Another benefit of this philosophy is that you will see
significant results quickly. This
factor is critical to maintain your motivation for this investment.
Summary:
1.
You must have control of your investment to maximize your chances
of success.
2.
If you relinquish control of your investments, diversify.
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