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Smart Investor: ignore the chatter, focus on the facts
Only by focusing on the financial data can you reliably identify good investment targets, says Smart Investor.
Many of us have been tempted to buy shares based on our fondness for particular brands or shops, but, warns Smart Investor, we ignore the cold, hard facts at our peril.
How do you pick your investments?
Over the years, I've come across a wide range of reasons as to why fellow investors have decided to buy a slice of a particular company.
For instance, the fact that an individual likes a particular product, such as a phone or computer, or has recently visited a busy store where the tills were ringing, have both been given as reasons for investing. I've equally heard people rule out investments with the same logic: ‘I will not buy shares in company X because I do not like their kitchens’ or ‘I went in company Y and a member of staff was rude to me.’
Of course, there is nothing wrong with these views and observations; I am not for one moment mocking them or saying they should not be held. However, I do feel that such opinions can hinder rather than help with the decision as to whether or not to buy shares in a particular company.
The subject is far broader than just companies; generalisations about sectors and regions are also prevalent among both private and professional investors. For instance, various investors will not consider sectors such as housebuilders and retailers at the moment because they point to data such as the recent GDP figures which show that the UK economy continues to struggle, so it cannot possibly be a good time to invest.
Of course, if you seek low prices when buying then you should perhaps be more interested at the moment, rather than less interested.
Furthermore, countries such as the UK, USA, Japan and Europe have been written off by various investors. A lost decade or longer appears to be the consensus; my question is how do they know?
How do they know that America will not enjoy improved levels of prosperity in future years? Why should the UK suffer a ‘lost decade’ just because Japan did in the 1980s? Guessing or applying some complicated formula which can be ‘tweaked’ depending upon its inputs is simply insufficient.
In addition, there remains a view among many investors that the best reason (sometimes the only reason) to buy an asset is when its price is on the up. Admittedly, this shows that sentiment has been positive, but just because a price has gone up, down or sideways does not mean it has any impact on its future direction.
Price is not akin to company performance (i.e. profitability) where a track record of steady profit growth can reasonably be expected to continue. Price is simply a measure of popularity among investors, and history has proved that they're are not right all of the time.
Focus on value
The truth is, a reason for investing/not investing in any company, sector or region can always be found, whether this focuses on predictions, complicated formulas, past price movements, an investor's own views on the asset or whatever else. However, the best reason to invest is because you are seeking long-term capital growth and income, and believe that the asset offers good value for money.
By good value, I mean the company/asset can be classed as ‘quality’ (financially sound, performing well, viable etc.) and the price at which it is being offered is fair.
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