What Sweaters Can Teach Us About Investing
Shopping season blazed in full glory just a few weeks ago and the strategic plans of browsers and spenders playing out in packed aisles nationwide. You were probably in one of those aisles – and while drawing a bead on that perfect and marked-down gift, you also honed a skill to help your portfolio.
The thorough retail prowl doesn’t require a body of professional knowledge but I am told that a certain skill helps, namely that of a hunter. Stealth shoppers exemplify a range of traits you might mistake for those of well-trained hunters: Find the prey, maneuver shrewdly and wait for the moment to acquire.
Occasionally even the best shoppers do miss their mark, the prized item snapped away before the pounce. Every now and then, fate rewards shopper/hunters’ patience with a lovely sweater at a dramatically low price.
Let’s say my wife finds a sweater at her favorite store. She likes the garment, perhaps even needs it, but she’s unwilling to pay full price. Instead, she returns weekly to see if the price drops.
Inevitably, some other prey she eyed goes on sale; she always returns with a catch of the day, but that’s another story. Point is, the original sweater she hunted had a price tag and she opted not to buy. When its price fell, the sweater became a deal – even “a steal,” to hear her tell it.
Let’s contrast this thought process to your investing in equities.
In most ways, equity shopping (investing) is the polar opposite of the retail hunt. Numbers don’t lie and the data proves conclusions. Investors pour more money into markets when stocks’ prices and perceived value rise, and they pull more money out when prices fall.
Every market bubble and corresponding correction shows this unavoidable truth. What causes the sharp contrast between shopping and investing?
One clear reason relates to understanding and embracing the product. You can touch and feel the sweater; it is hard to wrap your arms around a stock. You can snuggle into warm cashmere when the temperature drops; you really don’t snuggle into financial security because your high-growth technology mutual fund returned 9% last year.
The other reason: the herd mentality, alive and strong. When everyone buys, our nature is to join the party. When prices plummet, fear takes hold and we sell as fast as we can.
Momentum is a powerful force. Other market pressures also force professional investors to buy and to sell at various times. Both actions require discipline and process.
The example of stalking the sweater is a fair comparison in this case. We tend to identify a sector of the economy that we want to own based on analysis of its fundamentals. We then turn to the technical aspect of a stock, such as its price relative to its historic and recent behavior.
We either grab our prey and dash to the checkout, or risk waiting a week longer.
Attempting to find the best company at the right price, sometimes we wait too long and miss the opportunity. Other times we are rewarded.
In investing, ride out the ups and downs just like you do when you miss that great sweater on sale. Shop wiser in the future, but don’t give up on sweaters.
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Written by Joseph “Big Joe” Clark, CFP, the managing partner of the Financial Enhancement Group LLC, an SEC Registered Investment Advisory firm in Indiana. He teaches financial planning at Purdue University and is the host of Consider This with Big Joe Clark, found on WQME and iTunes. He is a Registered Principal offering Securities and Registered Investment Advisory Services through World Equity Group, Inc, member FINRA/SIPC. Big Joe can be reached at firstname.lastname@example.org, or (765) 640-1524. Follow him on Twitter at @Big Joe Clark and on Facebook at http://www.facebook.com/FinancialEnhancementGroup.
Securities offered through and by World Equity Group Inc. Member FINRA/SIPC. Advisory services can be offered by the Financial Enhancement Group (FEG) or World Equity Group. FEG and World Equity Group are separately owned and operated.
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