Understand What You Invest In No Matter What!

One of the reasons for me starting this blog was to hash out my investment strategy. By developing a system of rules and guidelines I can remove emotion from my trading. This is extremely important because with emotion comes stupidity. I started to rely on intuition instead of common sense which pretty much means I’m gambling on the market instead of investing.

Only invest in what you understand

Yes I know I must be an idiot for not following this advice already. This has always been the primary rule for great investors like Warren Buffett. The problem with such a simple rule is it lacks specifics so it’s easy to stop following.  This was my problem with USO. I never did the complete research myself. All I knew was that I wanted to invest in oil and resources around the web said USO was the best way. I took this information as me performing my due diligence which is just crazy.  I didn’t realize how complicated this ETF was and figured it was safe like index ETFs (that thought process is also incorrect as index ETFs can also be quite complicated).   In order for me to make wiser investment decisions in the future, I have re-written the rule and included some specifics:

Understand What You Invest In No Matter What! When making ANY  investment I must understand the investment based on the criteria below. Should I not meet these requirements I shall not proceed with the investment.

General

  • understand the risks associated with the investment
  • understand the tax implications of the investment
  • understand how the investment helps me fulfill my goals and requirements.

Stocks/Bonds

  • understand the underlying fundamentals
  • understand the company’s  market and what sets them apart from their competitors
  • understand the direction of the company and where its heading in the future
  • understand its past growth and its growth going forward

ETFs/Mutual Funds

  • understand the goals of the ETF
  • understand the costs involved
  • understand the strategies the ETF implements to achieve their objectives (like currency hedging and futures contracts)

Real Estate

  • understand the maintenance and future upkeep required on the property
  • understand the the direction that neighborhood is going in (are the residents getting older or younger, are they singles or families, etc)
  • understand the crime levels, education, and social programs available in the area (a family oriented neighborhood will always maintain its value)
  • understand the types services and stores in the area. Local vendors are a reflection of the neighborhood.

Of course this is a simple checklist on what I should understand about my investments. How I come to this understanding will develop slowly as my investment strategy takes shape. I will be reviewing all of my current investments because I must understand where my money is invested.