Monday, July 18, 2011

Invest Like a Vulcan

In recent posts I analyzed the “George Fund” and reported on things that George did right. But I also mentioned that the George Fund included a few “dogs” that needed to be sold. Can we learn anything by looking at the losers? Yes, we can.

Four of the stocks (most of the dogs) were in local (in or near Akron, Ohio) companies. I believe George bought these stocks for one of three reasons:

1. George was a businessman in the community and wanted to support other community businesses.

2. Many of his friends and acquaintances worked at these companies, so it gave George something to talk about. As mentioned previously, George was a huge “people person” and loved talking to people.

3. Many of George’s customers worked at these companies and it would be good for George’s business if people knew he was investing in their companies.

Of course it is impossible for me to know why George bought these stocks, but it was probably a combination of all three reasons. But that reveals a flaw in George’s decisions. The only one of the reasons that is legitimate is number three and only because you may be getting an indirect return on your investment.

It leads to the question: Why do you invest? The correct answer is: To end up with more money that what you started with.

You should invest your money to make more money, period. This is a totally acceptable concept and in its pure form does not involve greed. Wise investing has been endorsed at the highest level. In the “Parable of the Talents”, Jesus Christ uses the example of financial investment to make a point about spiritual matters. But the context is that financial investing to acquire more money is indeed good. Experienced investors know that greed is indeed bad (been there, done that, lost some coin.) Jesus didn’t care much for greed either.

So investing is good, but the purpose of investing is to make money. It is not to support your community, it is not to support your friends, and it is not for derived benefits. And most importantly, it is not to be done to make you feel good. We are emotional and rational beings. We make our investment mistakes when we become less rational and more emotional.

If you want to support “green” energy initiatives, buy the products, donate to the causes, but don’t invest in the companies unless you do the research and determine it is a good investment. It feels good to invest in a “religious” mutual fund where all the companies claim to adhere to certain principles, but the companies are chosen based on principles first and then results. You are investing for results. Give money to your church, give money to the poor, but invest your money based on your risk/return tolerance. If you love the food at a large restaurant chain, eat there as often as you wish. However, this is not a valid reason to invest in the stock (I have made this mistake). The only time I want to feel good about my investments is when I review my statements at the end of the month.

For a personal application, I will use the Smucker’s Corporation as an example. Here are the factors that influence my personal opinion of the company:

1. I love Smucker’s products. They make some of the best tasting products around.

2. Smucker’s is a local company with a great reputation and it supports the community.

3. I have friends that work at Smucker’s.

4. I have relatives that get paid to serve on Smucker’s food tasting panels.

5. Smucker’s is a strong supporter of my college alma mater.

Therefore, I would feel great if I purchased Smucker’s stock. It would be fun to own stock in this company. It would be enjoyable to tell people I am a Smucker’s stockholder. It would even make my peanut butter sandwich and cup of coffee taste better.

But none of these factors are valid reasons to buy the stock. It may be a great investment, but that is determined by research based on data, not emotions.

Conversely, I was seriously considering investing in a “green” energy company based on its growth potential and dividend even though I am not hot on the idea of wind and solar power. However, I have backed off the stock based on experts reporting that some subsidies will get cut in the next budget.

We are humans, not Vulcans, but I think Vulcans probably make better investors. This is not to say that moral and ethical factors are irrelevant when making investment decisions. These often come into play when deciding where “not” to invest. These will be discussed next time.

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