The Art of Investing
Part 1
In my opinion, investing is an art. Truly successful investors need a variety of skills and tested methods in order to properly evaluate investments and overcome obstacles. I do not mean art in the sense of paintings, drawings, or sculptures (fine arts), but art in the sense of applying gained knowledge and skill to effect a desired outcome or goal. As an investor, the ultimate goal is to make and keep profits.
Here are 3 definitions of art (from dict.org) which I apply to my investing:
- The application of knowledge or power to practical purposes
- Skill, dexterity, or the power of performing certain actions, acquired by experience, study, or observation.
- Skillful plan; device.
Application of Knowledge: Every investor needs to apply their knowledge to practical business and investment principles and purposes. Some of this knowledge is learned through education, such as accounting, finance, marketing, and business administration classes. Some knowledge is passed down from investing mentors, such as an investment banker uncle, or a daytrading cousin. A lot of investing knowledge you learn and experience yourself. Making bad investments will (or should!) teach how to avoid mistakes in future investments. Good investments can help confirm your rationale and methods, which you can apply to future investments. Learning the knowledge is half of the process; faithfully applying your learned knowledge is the crucial element.
Skillfully Performing: As in applying your knowledge, successful investors need to keep strong investment performance. The best way to maintain your cash flow and keep your investing profits is by being an active investor. People who are not actively involved with their investments – reviewing past and current investments, and researching new investments – will not be as successful as a person who takes an active role in their investments. I know a lot of people who invest money in the stock market, real estate, or businesses, but they take a passive role, hoping their investment will be successful. They aren’t keeping up with news, trends, and other factors that could be detrimental to their investments, and they end up losing money. As with learning, putting money into an investment is one step, but the major step is actively monitoring, researching, and developing your investment.
Skillful Planning: All investors need to develop their investing plan. Much like a business plan, your investing plan states your goals and the process by which you will achieve your goals. Your investment plan should also contain the strengths, weaknesses, opportunities and threats of each investment you plan to make. You must do your Due Diligene in each investment you plan to make. For example, in the stock market, you must analyze a companies accounting statements – balance sheet, income statement, cash flow, statement of owners equity – to get a feel for the companies management and how they run their business. Is it profitable? Do they have a lot of liabilities? How fast is cash coming in? How long do they keep inventory? Are insiders buying or selling? With stocks, you must also analyze news, company PR statements, charts, and historical prices. After you perform Due Diligence research, you may decide this particular investment is not for you or looks fishy. Every investment you make requires you to do your Due Diligence in researching the investment, and only then can you develop your plan on making your investment the most successful. Think of your investment as a business that earns you money. Develop your investment plan as a business plan, in order to make the most profits and most successful investments. The more time you spend developing your plan of action, you will be better prepared to make and meet your investing goals.