Frequently, I am asked by clients, ‘How do I know what stocks to buy’?
My response is often, ‘Your guess is as good as mine’!
This tends to elicit gut wrenching laughter. My response allows the individual to become relaxed in having a conversation about stocks where it takes the shape of more of a dialogue more so than a ‘lecture’.
The aim is to allow the average person who cannot relate to the varying ratios and other financial terminologies to feel empowered in making decisions about which stock to purchase.
This approach is not meant to trivialize the relevance of financial analysis (I’ll get to those at a later date) but to allow those less schooled in this regard to understand that economics at its core is an amalgamation of temperament and common sense.
“THE MOST IMPORTANT QUALITY FOR AN INVESTOR IS TEMPERAMENT, NOT INTELLECT.”— WARREN BUFFET
One day a family of four stepped into my office. The father frankly told me that he’s been hearing about stocks, but he feels intimidated as he knows nothing about it.
I then asked, ‘Do you eat corned beef’? Thrown by the relevance of my question he responded with a mumbled ‘Yes’. I continued to probe, asking which brand would he buy? A bit curious as to where this was all heading, he responded enthusiastically, ‘Nuh mus Grace’! He explained that he grew up on the Grace brand and it always taste the same. I explained that he made his decision based on market perception and brand reputation.
I turned to his wife and asked the same question. She responded that she preferred to buy Eve or Lasco as they were still reputable brands but were more affordable than Grace. I explained that her decision although still factoring in reputation was influenced by price. The eldest daughter noted that she buys the cheapest brands, I explained that her objective is to buy low.
I EXPLAINED THAT HER DECISION ALTHOUGH STILL FACTORING IN REPUTATION WAS INFLUENCED BY PRICE.
The youngest daughter announced that she doesn’t eat tinned food as she prefers ‘real’ meat. Her decision to buy is less about economics and more about personal values.
The family just explained how their decision to buy was guided by market perception, brand reputation, price, ‘buying low’ and values. These approaches guide the company that an individual may choose to invest in.
The reality is that stocks are based on future value and historical performance is no indication of future performance.
Who manages the company, its brand proposition, how the company services its current debt and the overall financial health of the company are all important indicators but ultimately, we are all buying into what we believe that company will be tomorrow and different investors will rationalise that in varying ways.
Now that you are more comfortable in accepting that on some level you are equipped to buy stocks, I will share with you in part three the two questions that you need to ask before you sign that equity order.
See you next week!
— Monique Wilson holds a Masters in Business Administration from The Edinburgh University and has over twelve years of experience in the financial market.