Archive for the ‘stock’ Category

Buying into a single stock

Tuesday, May 12th, 2015

If you chase big returns by investing in the latest hot stock, you’re likely to overpay.

Beware of buying into a single stock at the top.

This strategy worked pretty well for the people of the United States during the 2008 economic crisis. But it was not a good investment strategy for the global economy in the years since. The stock market now makes up only 1% of U.S. GDP. That’s not much. The world economy is way bigger. That’s how the stock market really works.

According to companies like SoFi, a better way to invest in the stock market is to buy small chunks of the market at regular intervals. This kind of investment approach tends to work a lot better than going big at once. The best way to build a portfolio from scratch is to invest in small, regular amounts each year.

Investing money for beginners | Maureen McGuinness | Highbrow

The chart below shows how regular stocks tend to outperform large, rapid-fire bursts of investing. You’ll notice that most of these periods of rapid buying end in busts. This is a good thing. We don’t want rapid, out-of-control bursts of spending. The worst part is that it can make you stupidly confident about the stock market. If you think the market will go up 30 percent in a single day, you’re likely to buy when the market is at 30,000 and then sell when it drops by 10,000, when it’s at 15,000 and then 20,000. It can be very difficult to see the difference between large, rapid-fire bursts of investing and regular, slow-moving stock market returns.

One important way to think about the stock market is like the stock of a city. A city is built on buildings and real estate and is owned by many different people. For example, Los Angeles is a city made of many different owners. The City Council is a powerful entity; the police chief is a powerful entity; the county executive is a powerful entity. As long as those entities hold their positions and act in their respective roles, they can keep the city functioning. Their power is not diminished by a single individual with an idea. (And that’s exactly what Tim Brown was talking about when he said, “we need more people with the idea.”)

As for Tim’s claim that his ideas might actually drive up prices, that’s really silly. Sure, some ideas might be attractive for an individual in the short run. But it doesn’t matter whether or not your ideas drive up prices in the short term. You need investors who are committed to your ideas for the long term. You can’t have a thriving, growing economy and a vibrant market for startups if a startup is not supported. If you don’t believe in a startup, you won’t fund it. If you don’t believe in your own ideas, you won’t fund them. It will all fall apart.

A few years ago I wrote an article about how investors were underrating the opportunities for entrepreneurship in China because of their limited understanding of the country. I argued that if they understand the potential, they should invest in China. I still believe this and have never doubted that a group of investors with a few years of experience and real knowledge of the country are capable of making investment decisions that are better than most people.