Investing is simple. Not easy.
There’s a very important distinction between the two. Particularly in light of what’s unfolded over the past year around the world.
A few years ago, I was listening to a gentleman who was probably 20 years older than me talk about how his guitar lessons were going.
He was intelligent. He was well-educated and successful.
But when he was a boy, his family pushed him toward science and engineering. Now, he ultimately built a lucrative career out of those. The problem was, for him to achieve that success, his family kept him away from anything having to do with the arts – music, painting, etc.
It wasn’t until later in life that he decided to take up guitar.
“It’s very frustrating,” he admitted after three years of playing. “I thought I’d be better by now.”
All of his other successes – his aptitude for science and math, his mountain of professional accomplishments – made him feel invincible. These successes made him feel like everything would come easily.
He figured that if he read voraciously about music theory, he would pick up a guitar and, magically, be able to play like Wes Montgomery or Stevie Ray Vaughan.
He didn’t expect to put in the same amount of hard work that had been required in his professional life.
I often feel this is the same mentality people have when they start investing.
They think it’s easy. Deceptively so.
They believe they’re going to become millionaires overnight.
And I believe a lot of the frustration – including claims that the markets are rigged or unfair – spawns from this idea that individuals can just jump in and instantly be successful.
Investing is simple… but it’s far from easy. Being able to understand the importance of one indicator could be the key in this hazy environment.
Easier Than Delivery
Buying shares of a company online is less complicated than ordering a pizza.
You just enter the ticker symbol and how many shares you want and press “submit order.”
It doesn’t get much simpler than that.
But buying shares of a good company – an investment that’s going to generate strong income and/or life-changing returns?
That’s far more difficult.
Investors need to understand the difference between good and bad valuation metrics.
They need to know whether a company’s growth opportunities are solid.
Whether a company’s revenue and earnings are beating expectations.
And whether management is intelligent and overcoming the challenges that dog its competitors.
The list goes on and on…
There’s a lot to consider.
And even if it all looks perfect – everything is in tune – a black swan event can swoop in out of nowhere and force a great opportunity to go belly-up.
That’s what COVID-19 has inflicted upon whole swaths of the market over the past year.
It’s how investors respond in moments like this that determines whether they belong at the “novice” table or are able to step up and join their more seasoned counterparts.
The Simple Indicator Investors Must Watch
We have been living in unprecedented times.
Take a moment to appreciate and understand how much uncertainty is still out there.
When will life truly get back to normal? Will there be another surge in cases? When will we be able to put the pandemic behind us?
We’re about to dive headlong into first quarter earnings season. And the long-term effects of COVID-19 on businesses are still yet to be seen.
The markets hate uncertainty. They fluctuate on a lack of clarity.
And when the level of uncertainty is high, the likelihood of mistakes increases exponentially.
But there is a telltale sign of confidence to which investors can turn: insider buying.
Company executives and directors must disclose when they purchase or sell shares.
These moves can provide some light in dark times.
These insiders know how their companies are faring better than anyone else.
So during times of uncertainty – when no one knows how much of an impact the economic shutdown has had – following the moves of insiders is one of the best windows into a corporation’s health.
Ignoring the broader markets and simply focusing on individual companies can help eliminate questions of whether investors missed the bottom or are buying at the top. And insider actions can provide even more insight into this.
Now is the perfect time for investors to add this indicator to their investing toolkits.
When watching great athletes, great musicians and even great investors, we often fail to appreciate just how much work went into honing their skills. The thousands of hours they spent practicing and training – repeating it all, again and again.
These individuals don’t view failure as a setback or disaster. They view it as a moment to learn and grow.
No one waltzes into the markets and instantly becomes the next Warren Buffett or Benjamin Graham.
But if investors take the time to study their philosophies and learn from their missteps – if investors adapt their strategies to the changing environment as insiders do – there’s no reason they can’t be successful.
Buying shares of a company is far simpler than learning chords on a guitar. But learning how to be consistently profitable takes far more years of practice and a more diverse set of tools. And this is something serious investors shouldn’t shy away from.
Here’s to high returns,
Matthew