Investing 101

There is so much noise out there when it comes to investing that I thought I’d share some of the basics with those who are unfamiliar with it.  It’s not magic, doesn’t require a PhD in finance and is easily understood.  The very first lesson that every new investor must know is essentially the “buy low, sell high” adage but with a bit more sophistication.  Graham and Dodd introduced it first with reference to the stock market and it’s summarized best by this quote:

“The market they argued was not a ‘weighing machine’ that determined value precisely.  Rather it was a ‘voting machine’ in which countless people registered choices that were the product partly of reason and partly of emotion.  At times, these choices would be out of line with rational valuations.  The trick was to invest when the prices were far below the intrinsic value, and to trust in the market’s tendency to correct.”
pp. 39 “Buffett” by Roger Lowenstein

Simply put when investing, buy when the price is well below its value.  The only caveat is that value is a very hard thing to judge.  To that point, Graham also had this piece of advice:

“To use a homely simile, it is quite possible to decide by inspection that a woman is old enough to vote without knowledge of her age, or that a man is heavier than he should be without knowledge of his weight.”
Security Analysis

And with regards to other methods of investing, let me quote Public Enemy and say: “Don’t Believe The Hype”, stick to what works.  And yes investing can be this simple.