Intelligent Woman’s Investing Rule #2: Know What You Know

The volatility of investor sentiment is one of the reasons people are afraid of the stock market.   I understand that.  Irrational behavior is scary.  That is why one of my tried and true investment tenets is:  Know What You Know and Know What You Don’t Know.

As you dip your toe into investing, you will learn that most people have an opinion on the stock market.   Almost everyone you meet will tell you they sold all their stocks before the last market crash or their broker got them into the latest growth darling at the ground floor.  I often wonder if that were so why their broker is the one driving the big Mercedes?  Investors like Dr. House’s patients often lie.

It would be folly to chase their tips or follow their advice.  You have no business buying companies you know nothing about.  That is irrational.

Know what you know.  And know what you don’t know.  Buy the companies you understand.  Not what your neighbor is buying.  Hold to that one tenet and you will keep yourself from zigging when you should zag.  And, from buying at the top or selling at the bottom.  Smart, long-term investing is about making informed decisions and then staying the course, not chasing the next great growth company.  It is about buying companies you know and understand at a good value and letting the company managements do all the heavy lifting of growing and managing the company while you tend to raising your kids or running your household.

Good investing means that when you are aware of what you don’t know, you steer clear.  And when you know what you know you have the courage to invest.  These are the topics we will discuss in THE INTELLIGENT WOMAN’S GUIDE TO STOCK INVESTING.  Stay tuned and follow my blog at  nancy.tengler.com/

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Women and Finance

According to Wilmington Trust’s Kathryn Karlic (and reported in this week’s Barron’s Magazine, women direct consumer and business spending of $7 trillion and are ranked first in spending clout in the United States. Consider that $7 trillion is on par with the entire output of China. And yet, women still shy away from investing.

My upcoming book: THE INTELLIGENT WOMAN’S GUIDE TO STOCK INVESTING will provide strategy and build knowledge for women investors.

Investing for the Long Term in a Twitter World

No one is more seduced by instant gratification than I am. Perhaps, that is why I love the stock market. Each day I receive a report card. That said, after thirty something years of investing in and observing the market, I also understand and appreciate the necessity of the passage of time for the growth of my investments.

If investors keep in mind that over the long term (and by that I mean since the early 20th century) the stock market has returned between eight to nine percent per year–  including every bear market–then we stand a better chance of maintaining perspective.

Often at exactly the moment we should be committing capital to the stock market, the bad news is overwhelming. We want to sit on the sidelines until things settle down. BUT, if we can adjust our focus to the long-term–say ten to twenty years–then we will have the courage to step up and buy high-quality stocks when they are cheap.

I outline this proven strategy in great detail in my upcoming book, THE INTELLIGENT WOMAN’S GUIDE TO STOCK INVESTING.

Stay tuned.

More From Chapter One of THE INTELLIGENT WOMAN’S GUIDE TO STOCK INVESTING

In September, 1988 I made two noteworthy and illustrative investment decisions.  

When our first child was born I purchased one share of IBM stock.  It was a symbolic action really.  I thought it would be fun to hang the certificate on his wall and use it as an object lesson to teach him about things economic.  Before I could get the share framed, I misplaced it and so the lesson was, for the most, part lost.  But I correctly left the investment alone and each quarter the dividend paid by the company was reinvested in an incremental share of IBM stock.  Twenty-four years later, that approximately $100 investment has returned 1020% or 10.6% per year.   During that period there have been two colossally devastating bear markets that frightened investors mistakenly into cash all the while our little share of IBM plumped and expanded like bread dough.  Though market corrections punched down the dough a few times, fueled by the yeast of earnings (which produce stock price growth and dividend payments) our value has grown at a pace far exceeding the rate of inflation and the return on savings or money market accounts.  For all of you stock market skeptics, it is also important to note that the return on the S&P 500 over that same period is a respectable 797% or 9.9% per year.  Simply investing in the stock market index produces enviable returns as well.  The chart looks equally compelling over ten, twenty and twenty five years.  I chose the time period featured below because it represents my actual experience.  But, time matters to investors; even if your timing is not perfect and you purchase shares before a market correction or a prolonged period of unimpressive returns (as I did, note IBM’s modest appreciation for the first ten years) over an extended period you will be asking yourself only one question:  Why didn’t I buy more?  Today, that one hundred dollar share of IBM is worth over $1,300.00.

 

Contrast that investment to another I made at the same time.  Two weeks after my son was born I was scheduled to make a presentation to Federal Express at their offices in Memphis, Tennessee.   None of my business suits fit and I was not going to be caught dead in a maternity outfit after the fact.  Especially the maternity clothes available to working women in the late 1980’s (but that is a story for a different book).  I rushed to the mall  and bought almost the first thing I found: a knee-length cashmere sweater that draped discreetly over the extra pounds and looked remarkably professional.  I wasn’t looking for cashmere and had no idea of the expense or the impracticality.  All I cared about was that it fit. I signed the receipt without looking, dashed back home and packed for the trip.  Dressing for the big event the following afternoon,  when I removed the tag, I saw the price for the first time: $1099.00.  One thousand ninety-nine dollars!  I was due in the hotel lobby in fifteen minutes.  

I still have the sweater.  It is wrinkled and bally as only cashmere can be and sports a few moth holes.  I obviously don’t wear it anymore, but I keep it as a reminder.  Had I invested that $1,099.00 in, say, IBM stock as I did for my son,  my investment would be worth $11,430.00 today.  Instead of a ragged and useless old sweater I would have a nice little nest egg set aside.      

 

It is important to understand that there was a real cost a real and an opportunity cost of my perilous sweater purchase.  To calculate the true cost of that poor choice I would have to consider the dollar amount spent ($1099.00), plus tax of approximately $80.00 and credit card interest of close to $220.00–I didn’t have the heart nor the means to pay it off at once–and the opportunity cost.   Think of opportunity cost in dating parlance as the one who got away.  It is the cost of not doing something or at the very least not doing the right thing.  When compared to the investment in IBM I might have made, the opportunity cost of my decision to purchase the sweater was $11,430.00 in foregone appreciation, added to the real cost of the sweater for a total cost of $12, 829.00.  That foolish and impulsive decision still echos.