Which Stock Investing Strategy Is Best For You?

Dear Reader,

Over the years, I’ve had the privilege of talking with thousands of people who want to get into the investing game. 

Usually these are people who have realized that it’s time for them to take control of their financial future. 

Often, the first question these people ask is how they can become a better investor or even a professional one. 

One of the questions I ask in return is whether they know how to make money both when the market is going up and when it is going down.

For most people, the concept of making money when the market is going up is easy. However, many are stumped when thinking of ways to make money when the market goes down.

The answer lies in understanding the difference between fundamental and technical investing.

Fundamentals Help You Understand What You’re Buying

If you’ve played the CASHFLOW® board game, then you know that when you play, you instinctively and intuitively learn about a fancy investing term called fundamental analysis. 

Fundamental analysis is the process of understanding a financial statement, along with assessments of the strengths and weaknesses associated with that statement. 

By learning how to perform a fundamental analysis, you also learn how to complete one at a corporate level. 

This is important when researching a stock to buy, or even understanding what’s happening with the financial health of a country that can affect the global markets because a fundamental analysis examines the strength of an entity. 

For success, you need to be able to tell the difference between an entity that is strong and an entity that is weak, be that entity a private company, a charity, even a nation. 

And we do that by looking at the financial statements. The financial statement tells us the strength of the entity. There are certain financial fundamentals that must be in line for any entity to flourish. 

Fundamental analysis also helps you to determine value. The more financially healthily the entity, the more valuable it is in the marketplace. 

Fundamental Investor

Rich dad said, “A fundamental investor reduces risk as he or she seeks value and growth by looking at the financials of the company.” 

For the fundamental stock investor, the most important consideration for selecting a good stock for investment is the future earnings potential of a company.

A fundamental investor carefully reviews the financial statements of any company before investing in it. He or she also takes into consideration the outlook for the economy as a whole, as well as the specific industry in which the company is involved, and the direction of interest rates.

Understand the Trends

Technical analysis is understanding the story of supply and demand in pictures. 

Supply and demand create trends. It is very important to understand trends because you will see that, with the stock market, an opportunity is always present.

The technical investor studies the patterns of the sales price of the company’s stock, asking, “Will the supply of the shares of stock being offered for sale be sufficient, based on the expected demand for those shares?”

Technical Investor

My rich dad said, “A well-trained technical investor invests on the emotions of the market and invests with insurance from catastrophic loss.” 

Technical investors are adept at studying the trends of the market and then using certain techniques such as short selling to capitalize on the market. They buy on price and market sentiment, not on fundamentals.

As with fundamental investing, technical investing takes investment in your financial education to understand the strategies needed to both be successful and to protect yourself from catastrophic loss. But once mastered, technical investing can be quite rewarding.

Technical investors are excited about market crashes because they position themselves to make money quickly when average investors are losing their money, money that often increases very slowly.

Become a Confident Investor

One of the reasons so many people think the subject of investing is risky is that most people are operating as technical investors, but don’t know the difference between a technical investor and a fundamental one.

Because stock prices fluctuate with emotions, technical investing seems risky to those who do not have a good financial education. They don’t understand fundamentals and have poor technical investing skills. And because they have no control over the direction of the companies they invest in, they’re susceptible to the whim of the markets.

Sir Isaac Newton, who lost most of his fortune in the South Sea bubble, is quoted as saying, “I can calculate the motions of heavenly bodies, but not the madness of people.” 

When there is madness and everyone is thinking about getting rich quick in the market, it’s usually just a matter of time before many people lose everything because they invested in the market with borrowed money, instead of first investing in their education and experience. When that happens, many people sell in a panic. That is when the qualified, confident investor really becomes wealthy.

It is not the crash that is so bad, but the emotional panic that occurs at the times of such financial downturns. The problem with most new investors is that they have not yet been through a real bear market, so how would they know what a market crash and bear market feels like, especially if it goes on for years?

Rich dad simply said, “It is not possible to predict the market, but it is important that we be prepared for whichever direction it decides to go.” He also said, “Bull markets seem to go on forever, which causes people to become sloppy, foolish, and complacent. Bear markets also seem to go on forever, causing people to forget that bear markets are often the best times to become very, very rich.

Average investors feel like investing is risky because:

  • They are on the outside looking in. If they don’t know how to read financial statements, they are totally dependent on the opinions of others.
  • If they can’t read business financial statements, chances are their personal ones are a mess too. As rich dad said, “If a person’s financial foundation is weak, his or her self-confidence is also weak.”
  • Most people only know how to make money when the market is going up, and they live in terror of the market going down.

But with the right financial education, the reality is that both types of investing are not risky.

Regards,

Robert Kiyosaki

Robert Kiyosaki
Editor, Rich Dad Poor Dad Daily

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Robert Kiyosaki

Robert Kiyosaki, author of bestseller Rich Dad Poor Dad as well as 25 others financial guide books, has spent his career working as a financial educator, entrepreneur, successful investor, real estate mogul, and motivational speaker, all while running the Rich Dad Company.

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