I get asked a certain question a lot. A question that these days makes me kind of scared whenever I hear it, because something uncomfortable or bad is usually about to follow. I’ve lost friends stemming from this question, had family members angry with me, been called all sorts of things, but still, I get asked the question all the time. What question? One that goes a little like the following.
“You think Seprod is a good stock to buy?”/”Will LIME go up?”/”You think Carreras is a good stock to invest in?”
The second I hear that I start to tense up. Not because I don’t know the answer (though I often don’t), not because I know the answer but don’t want to share it, not because I want you to beg & beseech me (I don’t want that) and not because I want you to stroke my ego 1st (I definitely don’t want that). No, the reason I tense up is because it’s a question that asks and implies so many more things than is immediately obvious. It’s a question that also lives on many an assumption, also without that being obvious. The thing is though, once you understand investing and stocks, you understand how much more goes into a simple question like that. You also understand why you can’t just answer it straight up. At least not unless you don’t care about the person.
Let me show the breakdown of this. First of all, “Will XYZ go up?”.
This implies that I;
1. Know your financial goals and timelines.
2. Know how much money you’re putting in.
- Can read the future 🙄.
Now I can understand thinking the last one, I run my mouth off about my picks and the gains I’ve made all the time. I can also excuse the 2nd one, because honestly, unless you’re working with large sums of money (think millions), most people need high investment gains (higher than the bank’s or Credit Union’s rate of return) so I can estimate a lower range of growth that you’ll definitely want no matter how large (or small) your money is. That leaves the obvious standout, your financial goals and timelines. I believe goal setting is the most important part of investing. Let me say that again for emphasis.
I BELIEVE GOAL SETTING IS THE MOST IMPORTANT PART OF INVESTING!!!!
Now, you might be wondering, “What does my goal have to do with whether or not XYZ is a good stock to buy Randy? You always come with this whole heap a things when I just asked a simple question… 🙄” Well there’s method to my madness, here’s the explanation. Lots of stocks are good, in fact the vast majority of the companies listed on the Jamaica Stock Exchange (JSE) are good and will go up in price sooner or later. Over time the market only moves upwards, and while this is a rule of thumb (not a hard and fast RULE) it’s one that has prevailed in markets all over the world (and JA) for YEARS. However, your personal goals are the thing that will actually determine whether or not something is a good investment for your money.
Two people can ask “Is Grace a good stock to buy?” and the answer to one is “yes” and to the other, “no”, and both answers still be correct.
See Person A, might have a high paying job, lives in a house they inherited and own fully and wanting to safely put away J$8M that they also inherited but don’t really need for day-to-day life. They just want it to grow safely, give nice returns, and be there for use in maybe 5 to 10 years. For that person, maybe Grace is a great option, it’s a huge company which, based on its financials, is unlikely to fail any time soon, and their profits, while large, are steady and don’t grow very rapidly, and they pay a dividend of about 2-3% of your investment amount each year. This might be perfect for Person A’s goals.
Person B however, has J$150,000, and lives hand-to-mouth off a very tight paycheque. That person needs money very quickly and in larger amounts AND they can’t just put it away for 5-10 years and forget it. For this kind of person, Grace might be a terrible buy. They can’t afford to put in the 150k, immediately lose about 3% (~$4,500) of it to fees. Then wait a year to make 7% (plus 2% dividends) on top of that money. I would be doing them a disservice if I said “Yes, Grace is a great buy.” Though Grace IS a great buy, cause I just told Person A that it was and I wasn’t lying.
See, this is the real problem. “Is Grace (or any other listed company, or ANY investment for that matter) a good buy?” is actually a longer question,
“Based on my current financial standing, life goals, current obligations and timeline for achieving those goals and fulfillment of my obligations, will putting my money in Grace be the best decision to help me achieve them?”
Now obviously, I can’t answer that question because I don’t know your life goals, current obligations, timeline to achieve your goals, etc. Once you understand that that “simple” question, isn’t ACTUALLY so simple, you start to see why I hesitate to answer.
So of course, I can’t just complain, I have to suggest a fix. So here’s my fix and quick primer. Note: I’ll be using the S.M.A.R.T (Specific, Measurable, Achievable, Relevant, Timely) template for these.
- Start your investment journey with setting Specific goals. It doesn’t have to be hard, or complicated or fancy. Just ensure that your goals are actually your goals (not just what sounds nice).
E.g. I want to buy a car next year April, the deposit on the car I want is 100,000. So your investment goal is “I want to have $100,000 to use as a car deposit”.
- Ensure that they are Measurable. The earlier example is also works here. Whenever I press someone on their investing goals I often hear things like “I want to have money” or “I want to be rich” or some such thing. Very nice sounding, very general. Very useless. Our example is already measurable; we have a 100k target. Let’s say this person only currently has 60,000, saved. So you already know that you will need to earn at least $40,000 to meet the goal.
- Is making $40,000 on top of $60,000 in 12 months Achievable? Well that’s a great question to ask your broker. Those are the sorts of questions they should be able to answer (and show proof). $40k works out to about 67% growth on top of $60k. That’s a nice target in my opinion so for purposes of this exercise we’ll say it’s achievable.
- Is the goal Relevant to your actual needs? Well I would say yes, however going a little deeper, we should recall that fees and taxes are associated with investing so we might actually want to make a little more than $40,000 in order to afford the fees and taxes. Let’s estimate the total fees and taxes at roughly 12% and add that to our goal. SO the new goal is 67%+12%=79%. (You might still want to ask if this is achievable within a year… I will say yes, again just for the purposes of this article…though I have made more than that in less than a year, but as JSE will tell you, past performance is not an indicator of future results.).
- What is the Time you’d like to achieve this in. We already have that down. Next August, so since I’m writing this in August 2018, we’ll call it 1 year.
Boom. There you have it. You set up a nice simple investing goal for yourself, but more importantly, you understand what kind of thinking goes into your “Is XYZ a good stock to buy?” question. Now you know that you need to have shared this goal with someone before you can then ask them “So, do you think XYZ is a good pick for me?”
Hope this was clear for you guys. See you soon. 👋🏾
By Randy Rowe