Monday, September 21, 2009

Do Not Buy What You Do Not Understand

When investing, never invest in a company that you do not understand. Before you invest, ask yourself, “Do you understand how they earn their money?” If not, remember you cannot hope to understand everything. The thing is just to move on to another company to invest in.

Another good question to ask yourself is “Do you like how a company makes it money?” Do you think that they treat their employees, their customers and the general public well? If the answer is no, then it is also a good time to move on. Is the company is the type of business I would be proud to support? If not, also a good time to move on.

My suggestion is that you should only invest in companies that you like and understand. There may be a good reason why you do not understand how a company makes its money. It may just not be doing as well as the financial statements show. It just may be that you do not understand a company’s business because it is not doing reasonable things. Other people may not understand it either, but few people seem to admit such things.

Also, if you do not like how a company makes it money, it is probable that others do not also. How long is such a company going to stay in business? It may do fine for long time, but things have a way of catching up with both people and companies. People may currently do business with a company they do not like. However, they will probably stop doing business with it as soon as they are able. The long term viability of the company may not be great.

Investing in companies you do not understand or like is not “capitalism” it is stupidity. How do you really expect to make money in the long term investing this way? Do you think that investing in some company you do not like or understand is any way to make money in the long term? Also, my use of “capitalism” above is a total misuse of the word. Some people feel because they live in a “capitalist” society, that everything can be put down to capitalism. I meet people all the time that who uses the word “capitalism”, but have no understand of what it means.

And, if you are working with a financial advisor, do not like him or her talk you into buying something you do not understand or like. It does not matter if it is a company’s stock or a product. May sure you understand what it is you are buying. If something sounds too good to be true it probably is. You will never get something for nothing. There are also no guarantees in life, and with everything, there are always risks. Make sure you understand anything you buy.

Remember that the most recent mortgage products that have done so much damage were thought up by mathematicians working at investment companies. They may know math, but do they know how the real world works? These math guys were considered geniuses. Do you know any geniuses? Do they really operate in the real world better than you do? If you invest, you are investing in the real world. So, give a little thought to what it is you are investing in.

This blog is meant for educational purposes only, and is not to provide investment advice. Before making any investment decision, you should always do your own research or consult an investment professional. See my website at for a list of the stocks for which I have put up spreadsheets.

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