Understand What You Invest In

Most seasoned investors have one piece of advice: Understand what you are investing in – or rather, do not invest in what you do not understand. I agree with this. I have lost a lot of money trying to invest in things I do not understand. I think many people reading this today may have gone through the same experience.

These days whenever people ask me where they should invest or how can they grow their money; my answer is always the same: What do you understand or what are you willing to learn? That’s your starting point. Why is the understanding of what you are investing in so important? Let’s face it. Many of us would rather be directly told what to invest in, right? This way, we don’t have to do the research.

Secondly, and most importantly, we are able to run away from the responsibility of mistakes and failures. When the stockbroker tells you exactly what shares to buy, you can always blame him/her when you incur a loss as a result of following the advice that was given.

Then your solution will be a better stockbroker, and you will repeat the same mistake with that stockbroker. Therefore the first reason that you need to understand what you are investing in is that it ensures you take full responsibility for the outcome.

No one became a good investor by playing the blame game. It is not about the stockbroker telling you what share to buy but also about you taking the time to understand why that share is a good investment. Think through the business the particular company is in and understand why it will grow.

It is not just about being convinced by someone else but being convinced that you understand enough about the investment to make a decision. That’s an empowering place to be. This is not about getting a guarantee that you will be right. Just because you understand something does not mean you will never be wrong, or that things that you cannot control will change. Acknowledging that you can and will make mistakes is simply part of becoming a good investor.

You learn from the mistakes and inevitably, you will do it better the next time. Sometimes taking one step backwards propels you five steps forward. An investor is always learning even through mistakes.

When you are committed to understanding what you will invest in, you also acknowledge that you cannot do all investments. You cannot spread your time and financial resources too thin. There is a lot of information on all types of investments and coming to terms with what you will focus on helps you filter out what you do not need.

You will find that you struggle with some but seem to pick others up quite easily. Focus on that and maybe use professionals where you have difficulty. There are some people who have taken the time to understand individual shares. There are people who have done the same with property or other business ventures.

I have a client who attended one of our stock market classes and was trying to convince himself that he must personally manage a share portfolio. However he is one of those people who just have a knack in property and was already doing quite well. His time was better spent continuing with that as opposed to learning about individual companies on the stock market. If he did want to have a stock portfolio, he could get professionals to manage it for him and or do it through a unit trust since he had already understood the broader reason as to why he wanted exposure to the stock market as well as the general risks.

He still however will need to understand what investment strategy is being used by these professionals and buy into it. Different people will invest in different things so you don’t have to do the investments that everybody else is doing. Remember when everybody wanted their side hustle to be quail eggs?

When you understand what you invest in, you will always strive to keep up to date with information.

After all, investment is really about application of information. Good property investors have information that guides them as to why a particular area is going to be in demand. In the stock market, people invest in information about growth prospects of a particular company or industry. In business, people have information on markets or trends.

If I have the basic understanding of where I am investing, I will know what information to keep up with. This same information will also let you know when and if to exit the investment. You will know when the tide has changed and will not overstay the festivities.

Develop a system to keep track of information pertaining to investment. Given the amount of time people spend reading other less important things e.g. on social media, this should not be too much of a struggle. Spend time in the company of people who are also interested in investing.

There is a lot of value in good conversations. Treat your investments as a continuous process and not a one off transaction. Keep understanding what you invest in.