Investing For The Long Run

Have you ever turned on a cable financial news channel and noticed a network pundit touting the next great investment? CNBC may have an analyst telling you that a small tech company is the next Microsoft and you must buy it today. Fox Business may have a gold expert telling you to buy gold despite the fact that gold is selling at a 30 year high. Or you may be at a social function and someone is talking about an investment that is guaranteed to double over the next year. What is the average investor to do with all of these “hot tips”? My advice to you is To Tune Out The Noise.

It can be tempting to try to make a quick killing and buy the hot idea that everyone is talking about. But more often then not you will end up getting burned and regretting that you ever wasted your precious dollars. Take the dot com-bubble of 2000 for example. In the late 90’s companies like MicroStrategy, Worldcom and America Online were soaring to new highs daily.  The internet was the place to be and everyone was investing in the tech sector. People were quitting their jobs and daytrading stocks full-time in hopes of getting rich. In 2000 the tech bubble burst and many daytraders found themselves declaring bankruptcy.

Another example is the real estate bubble of 2008. During the early 2000’s home prices increased dramatically to record levels fueling speculative home buying. Speculators bought homes with little to no money down in hopes of flipping them for a quick profit. Everywhere you looked people were buying homes hoping to flip them and get rich overnight. The housing market was saturated with people bidding home prices up to unsustainable levels. The bottom fell out of the housing bubble in 2007 with the subprime crisis and millions of people found themselves facing foreclosure or bankruptcy.

The lesson to be learned from both cases is to Never Follow The Crowd. While there will always be speculators trying to make a fast buck with their get rich quick schemes; remember that real wealth is built over time. Think of wealth building as a marathon and not a sprint. Building wealth is a long term endeavour that requires having a solid strategy and being committed to it.  One of the best ways to obtain wealth over a long term period is through investing. Follow these 3 simple steps and you are well on your way to Investing For the Long Run.

1. Identify your investment strategy.

Your investment strategy shapes the selection of your investment portfolio. Your investment strategy depends on a number of factors such as your age, risk tolerance and investment horizon. If your strategy is to secure a guaranteed return so that you can sleep at night then your portfolio may consist of conservative low risk assets such as Treasury bonds, savings bonds and certificates of deposits. If you are a high risk investor that seeks a greater return on your money then your portfolio may consist of individual stocks, small cap mutual funds and high yield bonds.

2. Invest in undervalued assets.

The key to investing is to find an undervalued asset and to hold it until the intrinsic value is realized. The intrinsic value is the true value of the asset. When investing you want to find an asset whose intrinsic value is greater than the current market value. Once the intrinsic value is equal to or greater than the market value, you sell.  The asset can be anything of monetary value including stocks, bonds, mutual funds, real estate, etc.  For example let’s say that you wanted to buy 1 share of McDonald’s with a market value of $50. If you believe that the true value of McDonald’s is $70 then you would hold the stock until McDonald’s reaches its intrinsic value.

3. Ignore short term market fluctuations.

Financial networks are only concerned with the short term outlook. The day to day movements of the market should only concern speculators. Only invest if your minimum investment time frame is a minimum of 5 years. If your investment reaches its intrinsic value in less than that time period, that’s great! If not, don’t worry. Be patient! You are investing for the long run.

Has anyone ever given you a ” hot tip”? What do you think is the best asset class to invest in right now? Is it the stock market, housing market or bond market?

  • gina

    Good advice, but not so easy to do! It was SO difficult to keep my money in the stockmarket last year when it crashed. Luckily, I didn’t panic and have seen a large return.

  • Connie

    lol…I am kind of ornery so I naturally go against the crowd. In finance this helps me, in some other things not so much.

  • DG

    these are interesting points and I’ve never done investing before. however, i was wondering if you had any specific recommendations for undervalued assets. I’m a bit confused by that since everything seems garbled to me

    • Mark Riddix

      Great question. I think areas like residential real estate are undervalued. Buying a home is a great investment in certain markets right now. I think a lot of energy stocks and financial stocks are undervalued as well. If you have never invested before I would say the easiest thing to do is invest in a mutual fund. Do your research first. You can buy a passive fund like an index fund that tracks a specific index like the S&P500 index. Or if you want more risk you could buy an actively managed fund with low fees and a solid track record.

      • DG

        thanks so much for providing such a great response! this info is helpful :)

        • Mark Riddix

          You’re welcome!

  • Sean

    I’m glad to see this article after the post about Jim Cramer’s service. In stark contrast to the service that will send you a text message with “hot stock tips” this sounds like great advice. Get in index funds, setup automatic investments, diversify, and ride the waves. Many more people fail at getting rich quick than those who do. For me, at least, slow and steady wins the race with investing.

  • CrisisMaven

    Well couldn’t be that not gold is at a 30 year high, but paper money at a 30 year LOW: Do we see a gold bubble? ?

    • Sean

      We keep hearing that gold is incredibly overvalued, and yet people seem to keep buying it. Hopefully when this bubble bursts it doesn’t have such a deep impact like the real estate bubble.

      • Mark Riddix

        I think that people are buying gold as a safe haven. Gold prices always increase when fear increases.

  • Mac

    I’ve been burned by a hot tip before…once I bought a stock on a hot tip, it immediately tanked and I ended up losing all my invested money. So one thing I’ve learned that if you get a hot tip, it’s probably no longer hot. Everyone has already cashed in (or out) by the time it’s trickled down to you.

  • jeccica simpson

    I have yet to invest in the stock market, people have told me its like gambling!! Scary, but if you make good decisions & investments, I guess you win huh??? Maybe!! HA HA HA!

  • Lauren

    This is a good article but I found the author’s response to DG’s question even more informative. I’ve read plenty of articles that say either “Buy this stock now!” or “Don’t follow the crowd!” I find articles that give useful, practical advice much easier to follow.

  • David/yourfinances101

    To me, the best advice is to ignore short term fluctuations. For those that “got out” during this current recession, you did yourself a disservice.

    You should have stayed in whatever you were in, with a few exceptions

    • Karmella

      I think that’s true, if what you’re in is a fundamentally sound investment that’s going to go back up.

    • Mac

      Agreed, as it’s very difficult to know when these fluctations will occur. Long term investors may lose some money during some tough days in the market, but they will also enjoy the really good days as well. It all works itself out in the long run.

  • Winston

    As for the tip about undervalued assets, the best time to pick those is during recession. During good times, it might be a little bit difficult; you might actually need to do a lot of research. But during bad times, there are plenty of them. For instance, one such company would be Citibank. It might be struggling a little bit right now. But it is very unlikely that it is going to go bankrupt because it is “too big to fail.” :)

  • Efren

    The tips here are good. In my opinion as a banker, I advise my clients to invest in a combination of investments. Let’s say a high risk with a high interest you may invest about 10%, in a medium risk you may invest 20% and 70% you may go with the low risk treasury stocks, savings, time deposit.etc. This is getting the best interest income in totality.This goes with the adage don’t put all your eggs in one basket.

  • Santosh

    Nice article — I like the baked-in commonsense that eludes most investing articles these days.

    Before looking to value stocks, I consider finding great companies to invest in vital.

    Then there’s the whole question of Stock Valuation.

    When you buy into great companies at decent margins of safety (undervalued), then you have to ignore the daily gyrations of the market and wait for a decent interval of time.

    As Warren Buffett once said, “I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years. “

    • Mark Riddix

      Excellent points!