Why I’m still investing
Posted by KC | Posted in investing | Posted on 24-10-2008
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I wanted to take some time to respond to Scott, who left a comment on this month’s net worth post asking why I was still buying stocks rather than paying down debt.
First I want to be upfront that I know that I go against most – if not all – get out of debt plans on this, but I believe that now is the time for someone like me to be purchasing stocks. Don’t get me wrong, I’m still aggressively paying down debt. The stock purchases that I make are minor. But the fact that I’m investing at all flies in the face of most debt advice.
Don’t get me wrong, some really bad stuff happened. People who thought they were a lot smarter than they were decided to light both ends of a candle and hope that it would last forever (my analogy for extending credit while selling the debt in the equity market – is it working? I just thought it up). The real problem is that this bad move was compounded by the herd mentality of investors – especially 80 or so million baby boomers nearing retirement. Think about it. When something spooks you that close to the finish line, you don’t take any chances. You take your money out and – again – the market reacts. Now this isn’t just boomers, this is everyone really. It seems the #1 rule of investing, “buy low, sell high”, is rarely actually followed.
“A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful.” – Warren Buffet, nytimes.com
I myself believe in this, however am still a passive investor. I don’t day trade or buy hunches. I research for a while, pick a stock I’d like to purchase over time and then use dollar cost averaging. Basically, I spend the same on stocks each month through an automatic plan. This, in theory, spreads out the cost of the total stock over time and protects against market changes. So when stocks are low, my purchase power is increased.
- How much money comes in?
- How much money goes out?
- What do they do with what’s left over?
However, again, please don’t take my word for it:
“I should emphasize that we do not measure the progress of our investments by what their market prices do during any given year. Rather, we evaluate their performance by the two methods we apply to the businesses we own. The first test is improvement in earnings, with our making due allowance for industry conditions. The second test, more subjective, is whether their “moats” – a metaphor for the superiorities they possess that make life difficult for their competitors – have widened during the year.” – Again, Mr. Buffet in the ’07 Berkshire Hathaway Shareholder Letter
If you couldn’t tell by now, I have a lot of respect for Warren Buffet. The bottom line is that I’m 28 years old. I am paying down debt without incurring new debt (student loans aside) and I have over 30 years to watch these stocks grow. Right now I’m just learning what I can and planting some seeds – I just try to by my seeds on sale, that’s all.
Did you know that GM stock is the lowest it has been since 1959? So pretty much anyone who bought that stock lost money. The market is still a risk no matter how you look at it. (I do invest though because I’m a risk taker LOL)