Investing: Doing it Yourself - Part 2

In part 1 of this series, I opined that “doing it yourself “investing is not for everyone. I gave a few tips on steps to take and questions to ask at each step that may provide helpful insight into whether self investing is best suited for you or not. You’ve asked the questions, answered them and now..You1; the new self investor is ready to invest. We left off with the question….. Now what do I invest in or what do I buy...Typical question for any investor especially beginners that don’t have a strategy or technique mastered for picking stocks, ETFs. Some people go with that gut feeling (not a good idea), some people invest in the company that currently employs them (this is some sort of quick subconscious valuation that carries a high risk - emotions attached). Now I’m tempted to dive straight into methods of stock valuation but before spending time on analysis, there is one vital step. You need to know what kind of investor you are.

Trader vs. Investor

Naturally, do you see things in the longer term rather than the shorter term or vice versa? Do you like graphs or love numbers and financial details?

Some people fancy investing for the longer term (more than 1 or 2 year). In this case, you are a probably what I call a “pure investor”. The “Buy and Hold” Breed.

For those that see things on a shorter term basis (months rather than years)? Then short term investing (Trading) might be your forte. In other words, shorter term investors are more or less Traders and will be referred to as traders in these series from now on. One thing, it is possible to invest using both long term and short term strategies and time frames but will leave this potential complication for much later.

Investors take positions (buy stocks) in publicly traded firms with the hope that the value of the stock will grow overtime but that’s not all, Investors also invest for dividends. They care less if the price rises $5.00 one month, falls $6.00 the next month and rises $1.00 and so on, they are looking at the long term and also satisfied with the quarterly dividends (if applicable). As an investor, you do your due diligence and “let it ride.”



Traders on the other hand, care less about dividends. Traders chase yield on the basis of shorter term price behavior. As a trader, you have to be tuned-in to event risk. Traders do the initial analysis and are also plugged into the day-to-day financial ripples related to the firm and also the general financial markets. For example, BP (British Petroleum) shares have fallen in price fairly significantly over the past 3 weeks. The fall was instigated by the oil spill in the Gulf and amplified by the Greek crisis (talk about a double wammy). A trader will want to be aware of this sort of short term events. An investor might take the view that…in the long term, BP is valued higher and regardless of how it behaves relating to the spill (which is short term), the price per share will be “x%” higher than were it is now let say in 2 years or 10 years. Many traders depend on Technical Analysis to help determine what to buy and when to buy while some others depend on Fundamentals. The next series will focus on these two distinct types of analysis.