I just got back from Omaha, where I attended the Annual General Meeting for Berkshire Hathaway – Warren Buffett’s company – so, it’s timely that I remind you there are only a TWO sensible ways to INVEST in stocks – BOTH recommended by Warren Buffet – plus one Speculative way:
1. Buy and Hold low cost, diverse Index Funds (check out Vanguard’s web-site, and others) – this is a long-term, low risk (if your holding periods are 30 years) strategy that can help you fund a normal retirement.
2. Invest in a FEW stocks in companies that are:
(b) have a large margin of safety,
(c) that you love, and
(d) are prepared to HOLD …
… until the rest of the market decides that they love them, too, at which point you cash out and go back to (a).
Anything else is SPECULATING – lots of people have made a ton in trading stocks and options (e.g. George Soros, but he was smart enough to know to quit gambling when you are ahead) – or UNDERACHIEVING such as following the herd and/or buying high-cost Mutual Funds.
You may be one of the few that can succeed in either of these alternative methods … but, please don’t offend the World’s Greatest Investor by calling it INVESTING …
We believe that according the name ‘investors’ to [people or] institutions that trade actively is like calling someone who repeatedly engages in one-night stands a ‘romantic.’ [Warren Buffett]
So, there are only two methods that Warren Buffet would recommend (and one that he clearly would not) – one for the wise and the other for the even wiser – which one would you choose?
Well, the ‘news’ of my 7 Millionaires … In Training! ‘experiment’ is finally out … check out my friend, Bill’s post on Money Hacks, then click here to find out more …
I do both
I have Index funds in my retirement account and a few good stable growth stocks for non retirement money
@ MoneyMonk – Warren Buffett would be proud of you … on both fronts 🙂
I feel like trading gets a lot of bad press on many PF blogs, even though it doesn’t have the same “sense of security” as long term investing it can still be tremendously profitable for many people. Just like any extremely competitive endeavor there are only a limited number of people who are consistently successful long term. But then again how many kids get into Harvard and how many players make it to the NFL. Point being, trading is not something you can just do on the side and expect to make tons of money but just because few succeed at doing it doesn’t mean it isn’t possible.
In my view it’s a research question.
Have the time/desire to research the stock in depth, preferably going to their office in person and reading the ‘books’ yourself? Then you can reasonably evaluate the stock.
Don’t have the time/desire? Go with the index funds.
A lot of people miss that Buffett, from day one, researched everything he bought. Too many people think you can figure out a good stock from “crunching the numbers” – as both a programmer and economist I can say that it’s not hard to ‘push’ your book numbers in a way to make it look amazing by some technical measure or another. Technicals are used to get a starting point, not to pick the winners.
My strategy is:
a.) Index funds (or ultra-low-cost-buy/hold funds) for my ‘real’ retirement accounts (IRA, 401(k)) and to ‘save up’ for a more researched pick.
b.) When my regular brokerage starts getting big enough to justify paying a trade fee start to do some research.
I’ll also add that certain markets are more inefficient than others and harder to index, for example micro-cap stocks. Thus some good, solid active funds are in the area if you spend the time researching the funds (I’m fond of Royce, personally) that can be invested in.
@ Andrew – you might be surprised to know that I actually AGREE with you … just don’t call it INVESTING … if you trade, you are in the BUSINESS of buying/selling stock for a profit (this is a Making Money 201 activity). Just be sure to INVEST the profits so that you have something to retire on …
@ Stolid – Warren Buffett says that the smaller investor can make a lot more money than him … for example, we can buy Micro-caps – he can’t (too small for him to bother) … I absolutely agree with your comments about the ‘numbers’ just not being enough to base a decision on.
Exactly, trading and investing are very distinct and serve different purposes. It is a shame that so many people confuse them with each other.
On a side note I would be really interested to read more posts about the process of starting and growing your business.
@ Andrew – Yes … trading is a BUSINESS – nothing wrong with that, provided that you are prepared to treat it as such. I presume that you have a business of some sort in mind? Have you applied to participate in my ‘grand experiment’ yet? You can apply at 7m7y.com
Yes, I applied a few days ago. I have internet startup and trading/investing experience so I am currently mapping out a couple of web ideas that cater to that clientèle.
@ Andrew – sounds like you got the right ingredients, with or without my help … good luck!
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