When to Buy Stocks
Instead of aimlessly searching for some priest, or guru, or expert to do your thinking for you, here’s a simple step-by-step process. It’s basically the process great investors like Steven Schwarzman of The Blackstone Group use. Schwarzman, by the way, was the highest paid executive in the U.S. last year at around seven hundred million dollars.
Just start from scratch and build your own strategy, undistorted by the pull of the herd. You’re about to become your own leader. You’re about to start thinking like a billionaire. I can tell you from experience, the big money will follow. Here then, are a couple of simple steps to devising your own strategy instead of following the lead lemmings. At the same time, I’ll also give you some in-depth directions on how to get them right. Ready? Here we go.
First, forecast future events using vision instead of extrapolation. Consider tactical moves and adjust your forecast based on your estimate of their success. How confident are you in your forecast? Make a realistic assessment of the chances that you’re wrong. WARNING - those chances are definitely not zero. This is the step the big boys never miss, and the amateurs almost never take. If you think your stock or your company could double in value over the next 3 years, but you see a 30% chance of being wrong, that’s not a better investment than a company with a very high chance of success that makes 20% a year. This kind of thinking won’t make every deal you do come out right, but it’ll mean the difference between rich and poor.
The reason most of us miss this obvious common sense step is that common sense has been completely removed from the process of judging risk. The whole middle class retail investors’ world, the financial planners’ world, and the world of finance as studied at university is based on an idea that is totally wrong: Financial planning, as it is practiced today starts with the idea, “Let risk equal volatility.”
This is the concept that lost you all your money, and you didn’t even know it. That whole religion we talked about earlier – the Modern Portfolio Theory - was based on this errant idea. Economists won Nobel Prizes for the idea that they could measure risk accurately by measuring volatility. Once you get past the very shortest time frame, trading in minutes and hours, this idea is totally wrong. Risk is not synonymous with volatility. Risk is the chance of you being wrong and losing money. Volatility only serves to describe vibrations. It’s meaningless, except when it comes to time frames so short that price movements are unrelated to any changes in the value of assets. Then, volatility or vibrations are all that matter.
*Excerpts from "A World without Borders" by Dan Frishberg
