Tips for Investing

1. Speculating or Investing
You can “beat the market” (and most professional money managers as well) if you truly understand investing. What most people consider investing is really just speculating, and there’s a world of difference between the two.

If you buy stocks for “a quick gain” you’re not an investor; if your time frame is measured in months rather than decades, you’re not an investor. If you don’t know the underlying fundamentals of a company and its financials, you’re not an investor. This doesn’t mean you can’t make money — it just means you’re playing the game, not the odds.

As an investor in stocks, you are making a choice. You are making a commitment to ignore the seemingly easy money of the “hot” stock (which might not be so hot), in some business you kinda, sorta understand but that didn’t seem to matter much anyway because you were just in it for a quick profit. Once you’re out of the speculating game, once you insist that your future wealth shouldn’t be part of a game, you’re halfway home.

2. It’s a Market of Stocks, Not a Stock Market
Everyone is focused on what the market is doing — whether it’s the Dow Jones Average or the S&P 500 Index or the NASDAQ Composite. The underlying implication is that stocks march to the same drummer, rising and falling together.

Certainly, all stocks react to the same outside influences, such as economic growth, interest rates and exchange rates. But each stock reflects the valuation of an individual company, and each company has its own unique risks and opportunities.

Predicting the direction of the Dow or the S&P is more difficult than it seems at first. For one thing, knowing where interest rates are heading is an elusive skill, the abundance of expert opinions notwithstanding. For another, you don’t know what the true earnings of an index really are. Which are more accurate: reported earnings or operating earnings? “Bottoms up” estimates or “top down” estimates?

Legendary investor Warren Buffett pays no attention to the level of the market in deciding which stocks to buy or sell — and neither should you.

3. Three Big Ifs
- Stocks offer better potential returns than bonds or cash if you buy them for the long term.
- Time can be your greatest ally if the companies you own have predictable growth.
- Predictable long-term growth is rare but attainable if your companies have sustainable competitive advantage.

4. Your Advantage
Great businesses have one thing in common: They each maintain an advantage over their competitors. This advantage is the source of their success; it is what separates great companies from the host of pretenders.

One type of competitive advantage is a cost advantage — namely, a company that operates more efficiently than its competitors. The other major category of competitive advantage is a quality advantage. If a product is truly better, or even thought to be superior, consumers will pay more for it.

Finding a company with a competitive advantage is not enough, however. You must also determine that its advantage is sustainable. If the company has a lower cost structure, is there a way that its competitors can catch up? If the company has a superior product, can the product be duplicated?