5 Questions to Ask Before You Buy or Sell Anything
by Brittany Stepniak, Outsider Club This week, our Outsider Club editors have been sure to share our views on the market crash in light of Black Monday fears rising from all the dark depths of every corner of the interwebs at the start of the week. Now that things are looking a little brighter (granted, it would have been nearly impossible for stocks not to rebound from Monday’s extreme lows), we’re hearing a lot of best-case/worst-case scenarios.
On the one hand, we’ve got CNNMoney reporting that “stocks aren’t headed for a crash”, touting an overall healthy economy… on the other hand, I read a Forbes article yesterday indicating that the world lost 66 billionaires in just eight days while Marc Faber’s telling his followers to expect markets to fall 20 to 40%.
That massive drop in global stock prices not only affected the world’s wealthiest, it impacted everyone with a 401(k) retirement plan. And just like Nick told you yesterday, the real problem here is the narrative that’s being told. As Forbes contributor Bernard Marr so poignantly points out, “too much data obscures the truth.” Facts can be pretty easily manipulated if you don’t know exactly what you’re looking for. My husband is a financial analyst/money manager so we talk about this all.the.time. When he’s seeking out new investments, he has a lot of data to sift through. It’s probably far more than what’s necessary to make a decision on what companies to invest in… But over the past few years, he’s learned that mediocre companies can be pretty good at obscuring the truth by over-selling data that fits in conveniently with the narrative they are selling. Even experts can miss the mark if they don’t ask the right questions.
Regardless of what mainstream media is selling you, make sure you as an investor are asking the right questions about potential investments before you let media pundits and raw emotion drive you to make potentially devastating mistakes.
It seems like everyone’s got all the answers, but no one’s asking any meaningful questions…
To avoid panic-selling or getting overly emotionally attached to your investments, keep a level head by asking logical questions.
The market can be an unpredictable beast that may never be tamed, but that doesn’t mean your investment strategy can’t be.
Questions to Ask Before You Invest
1.) Do you understand the investment?
If you can’t understand how a particular play will help make you money, do more research. Check with a financial professional for more detailed information.
Make sure you understand the difference between blue chips and “cigar-butt” opportunities. Blue chips are stocks in corporations with a national reputation for quality, reliability, and the ability to operate profitably in good times and bad. On the contrary, cigar-butts are smaller, less loved companies that you buy into at a huge discount to asset value.
Both can be profitable investments (if you diversify accordingly), but you’ve got to look at each on a case-by-case basis. Every time you consider investing in any type of stock, make sure you understand exactly what you’re investing in before you buy. Trust me, this will save you countless headaches.
If you don’t understand the investment well enough to explain it simply to someone else, read more about it. (That’s where we come in — browse our resource pages and reports for further guidance and subscribe to premium content to get the inside scoop and early advantage when it comes to lucrative new investment ideas that line up with your future goals.)
2.) On that note… What are your goals?
Before you can embark on a successful investment journey, you have to envision some sort of destination. Short-term financial goals might include traveling, new cars, or large furniture items/appliances. Mid-term goals could include homes, college/wedding funds for children, or launching a side-project/small-business endeavor. Long-term goals encompass retirement, charitable giving, and family legacy.
If you’re just getting started, it’s best to reduce or eliminate credit card debt before diving into the investment realm. The interest charges for credit cards are likely going to be greater than any investment returns you’ll make in any given year.
If you’ve been investing for a few years and are relatively young, you can take on more risk. You’ve got more time on your hands to balance out your losses later. If you’re approaching retirement years, you want to play it safe(r).
This is pretty basic stuff, but hugely important and very easy to forget in the throes of emotional investing coupled with market madness. Your portfolio should always line up with your unique goals. Outsider Club’s CFA Jim Collins talks more about how to do this here…
3.) What are the risks (and how do they compare to potential rewards) of this investment?
Again, depending on your age, income, and current savings you need to assess how much risk you are comfortable taking. A good way to minimize risk, of course, is diversification. It’s definitely good to have between 10-20 stocks to jumpstart your portfolio (Jim recently worked with a client in London and started with what he calls his “sweet sixteen”.)
It’s also ideal to look for dividend payers. These are quality stocks that offer steady payments with the opportunity to reinvest the dividends to purchase additional shares of stock (DRIPs). The best part about dividend stocks is they are usually only associated with companies that are well-established and financially stable. As their stock price steadily rises, shareholders are rewarded with dividend payments, which also often rise steadily over time.
Indeed, dividend investing takes a lot of the guesswork and risk away from investing. You may not be guaranteed a dividend increase every year, but it’s certainly plausible. What you can bank on for sure is that a dividend paying company is healthy with a consistent cash flow (which is how they are able to pay you and other shareholders these handsome dividend payments periodically).
Penny stocks and options can be wildly lucrative if you get in and out at the right time, but definitely not for the faint of heart if you aren’t in the know.
Jim suggests looking for these four elements when determining if a start-up company is going to be worthy of investment:
- Participates in a large and growing market segment,
- is gaining market share in that segment,
- has proprietary patent-protected intellectual property,
- and has a pathway to profitability.
4.) What catalysts will affect the stock going forward?
This is a particularly loaded question, especially for amateurs. Googling a company is going to present you with an overwhelming abundance of information. And this goes back to the theme here: too much data obscures truth. That’s why it’s great to be a part of an investment community like Outsider Club with a diverse group of editors and experts who can shed a more realistic light on what’s going on in various industries.
Nick’s got you covered if you’re interested in energy, precious metals, medical technology, or biotechnology. Jimmy Mengel’s got you covered if you’re looking at blue chips, DRIPs, emerging new sectors (i.e. the budding marijuana industry), and other generic but stable and lucrative retirement investment options. And Jim Collins is here to offer his expert CFA guidance when it comes to proper strategy and management of your portfolio at large.
And the rest of us are diligently following the news, global trends, and global economic policies that might impact our readers’ investments.
Bottom line: we’ll be the first to tell you about any potentially negative catalysts that could adversely impact a particular industry or the share price an editor’s stock pick.
5.) When’s the best time to buy?
It’s too bad Insiders are more readily able to follow Buffett’s mantra to buy when others are fearful and to be fearful when others are greedy. Average Joe investors just don’t quite have the same intel and pull that the Insiders do.
Don’t get me wrong, this is, again, very basic but hugely important advice. You definitely want to buy low and sell high. But that doesn’t mean you need to obsessively check the market like an addict, buying and selling at every omen and talisman hidden between the lines.
That’ll only leave you stressed, depressed, and probably broke, eventually.
*Sidenote: a Chinese man reportedly jumped 17 floors to his death Tuesday afternoon, unable to cope with China’s stock market collapse.
You can avoid all that kind of angst by creating and sticking to a solid, diversified plan. And never put all your eggs in one basket, no matter what narrative you’ve been sold.
Remember, the market is cyclical. Corrections and crashes are inevitable. Timing can be tricky, but panic-selling never ends prettily.
Whatever you decide to buy, buy low and don’t panic every time the market dips. It’s probably going to happen plenty of times before you sell for the gains you want. As long as any given company’s fundamentals look good, it’s okay to stay optimistic and keep your emotions at bay.
If you’re thinking long term, just breathe deeply and stick to your goals. As Nick suggested yesterday, keep some metals in the mix to protect yourself from major market blunders.
Bear markets can be downright scary, but they can also be rife with opportunity if you keep your cool.
Invest wisely, friends!
Farewell for now,
Brittany Stepniak is the Project Manager and Editor for the Outsider Club. Her “big picture” insights have helped guide thousands of investors towards achieving and maintaining personal and financial liberties while pursuing their individual dreams in lieu of all the modern-day chaos. For more on Brittany, take a look at her editor’s page.