Today’s investing environment is one that forces decisions to be made and, consequently, many errors. In so many cases, investors take an emotional approach to their portfolio, resulting in impaired profit-taking or riding the bull to the bear without letting go. Additionally, I’ve witnessed many astute men and women rely on countless research reports just to buy a stock and stay up all night worrying about it.
My call to action is to take a pragmatic approach to investing. Put aside all of the quantitative analysis, expert opinions, and broker suggestions. When you take a step back from all of the white noise, the bigger picture emerges, and an educated business decision is at hand. This decision is educated because of a real identification of risk, understanding what indecisiveness should produce, and finally, what a committed investment should look and feel like.
Identify what risk really is
Since neither you or I could ever know what exactly tomorrow would bring, we shouldn’t try to speculate on the details of the future, but focus the broader implications of what we are involved with now to curtail any surprise as much as possible. This philosophical perspective should posit a healthy fear into our lives, financial lives, and future.
Protection of assets is key to survival. Risk in your portfolio comes in several forms, the most prominent being the fact that you are not directly involved with the companies you’re invested in and mostly rely on third-party information to make investment decisions. In many cases, investment decisions aren’t based on cash flows, net present values, and bottom line revenue growth, but on subjective metrics such as price/earnings versus peers, technical indicators, and even rumors.
When in doubt, go to cash
I am going to assume the money you have invested has been acquired over years of hard work and saving, and is not the result of a lottery ticket. You know the value of the dollars invested, so why invest them if there is a shred of doubt in your mind?
Too often, investors move on risky positions because of a “gut feeling” rather than hard facts. During the arduous process of stock-screening or rifling through research reports your broker has sent you, fatigue sets in and the need to “just pick one” overtakes logic, and the feeling—better yet, emotion—that something needs to be done leads to an incorrect decision.
Rather than place the cash in a risky situation where you can lose due to indecisiveness, move the fenced assets to cash, where at least the most you can lose is the net margin between interest and inflation. I would much rather lose inflationary percentage points versus losing on market and stock volatility.
What should we buy?
When we boil it all down, what do we really know? We know that a particular company makes a particular product and we want to be a part of it. Or even, a stock is trending in a way I like, so I will act on it accordingly. It sounds to me emotion is involved, not objective fact.
So how do we protect our wealth without succumbing to the status quo investment approach? That is by taking calculated risk; invest in the companies whose products and services you use, so your real-time “in” on what’s happening with the business is right at your fingertips. You have first-hand knowledge of what the business is doing, and thereby reduce risk, remove emotion, and base your investment on the most important fundamental for any business: Does the product or service work and will I keep buying and using it?
I love to eat. My appetite has made me wander into The Cheesecake Factory Incorporated (NASDAQ:CAKE) more than once. Actually, I eat there quite often because of the fast service and large portions. Every time I go for lunch or dinner, there is a significant waiting time.
What I know about the company is that they have over 160 restaurants called “The Cheesecake Factory Incorporated (NASDAQ:CAKE)” and bring in over $1.8 billion in revenue. It is hard for me to personally dispute the broader financials of this company due to my experience waiting in line for food and watching the volume in this restaurant — and other The Cheesecake Factory Incorporated (NASDAQ:CAKE) restaurants I’ve visited — stay consistent throughout my visits.
Did I mention the food was good? Let’s face it, The Cheesecake Factory Incorporated (NASDAQ:CAKE) isn’t Alain Ducasse or Daniel Boulud, but quality and portions aren’t lacking in comparison to TGI Friday’s or Applebee’s.
So, with the food being something I enjoy, noticeable and steady volume, and widespread reach, I would love to purchase shares in The Cheesecake Factory Incorporated (NASDAQ:CAKE). My investment would be an “ease-of-mind” one at the least, knowing my decision wasn’t based on third party experiences or analysis.
I take cholesterol medication. Although I don’t blame The Cheesecake Factory for my need to take cholesterol medication, it may be a cause as to why I must continue to take it. The drug company Actavis Inc (NYSE:ACT) supplies me with atorvastatin, which has kept my cholesterol to a cardiologist-happy 130.
Thankfully, insurance covers this generic form of Lipitor. The drug has done wonders with my cholesterol in a short amount of time and continues to be my piece de resistance against cardiac problems.
Outside of using the drug itself, I do know that Actavis Inc (NYSE:ACT) (formerly named Watson Pharmaceuticals) generates over $8 billion in sales for their various generic drugs. Additionally, they are one of just two major manufacturers that are currently producing the generic form of the blockbuster Lipitor. If you can recall, Lipitor is the number one best selling pharmaceutical in history, booking in over $150 billion in sales for Pfizer.
So with The Cheesecake Factory and Actavis Inc (NYSE:ACT), I am not only eating well and living well, but also using the two on a regular basis. Knowing this, I can make a wise decision into a pharmaceutical company without having detailed scientific knowledge of drugs and quantitative analysis of future pipelines. I know for as long as there are unhealthy Americans, Actavis Inc (NYSE:ACT) will sell a valuable product, keeping my investment safe.
I drive a BMW. Since 2006, I have been a vocal fan of Bayerische Motoren Werke A.G.. My personal opinion is the cars are fast, stylish, and presumes wealth and sophistication. Because of this opinion, I also believe that the reason I see more and more BMW cars on the road is also a sign of narcissism in the Americas.
I’ve owned several models and currently drive their 328i model, which is a beautifully adorned car with all of the bells and whistles. The reason I bought the BMW, rather than a Mercedes, was because of the maintenance inclusion in my monthly payments. I don’t have to pay for a thing unless I break it.
As the competition for sophistication grows in the United States, and as the new yuppies of metropolitan New York — where I live — continue to edge each other in vacations, cars, and other toys, I feel secure in knowing an investment into this company will be safe. I mean, why wouldn’t I invest in a company when I knew I was going to purchase my next car from them?
Conclusion
Far too often I hear investors scratch their heads and then make a rash decision. Like noted above: When in doubt, go to cash. If you are currently looking for prime investment ideas, stay away from piles of analysis and reports and go for what you know already. At the most, you’ll be able to significantly capitalize off your investment, and at the least, during market volatility you will be able to sleep better at night.
Michael Mandala has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.
The article Turing the “Risk-On” Switch Off originally appeared on Fool.com and is written by Michael Mandala.
Michael is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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