Investing in the Information Age
All coins have three sides: heads, tails, and the edge. According to F. Scott Fitzgerald, the most intelligent people live on the edge, able to see both sides. He said, “The test of a ﬁrst-rate intelligence is the ability to hold two opposed ideas in mind at the same time and still retain the ability to function.”
I use the example of a three-sided coin as a metaphor for real intelligence. I say “real intelligence” because whenever we see life through the prism of “right and wrong,” we become less intelligent.
One of Bucky Fuller’s generalized principles—principles that are true in all cases, no exceptions—is, “Unity is plural, at minimum two.”
In other words, the concept of “one” does not exist. In the real world of planet Earth, two is the minimum, not one. For example, the concept of up cannot exist without understanding down. It cannot exist without comprehending out. Smart cannot exist without stupid. Left would not exist without right. Rich would not exist without poor. And man could not exist without woman.
The moment you operate from the concept of “right and wrong,” your intelligence is cut in half. This is why standing on the edge of the coin—seeing both sides rather than taking sides—increases your intelligence.
Rich dad said, “A fundamental investor reduces risk as he or she seeks to find value and growth by looking at the financials of the company.”
The most important consideration for selecting a good stock for investment is its future earnings potential.
A fundamental investor carefully reviews the financial statements of any company before investing in it. The fundamental investor also takes into account the outlook for the economy as a whole as well as the specific industry in which the company is involved. The direction of interest rates is also a very important factor in fundamental analysis.
The fundamental investor analyzes the company from its financial statements to assess the company’s strengths and potential for future success. Also, the fundamental investor tracks the economy, and the industry of the company. Warren Buffett has been acknowledged as one of the best fundamental investors.
A technical investor invests from charts that track the price and volume trends and patterns of the company’s stock. The technical investor may review the put/call ratio for the stock as well as the short positions taken in the stock. George Soros is often recognized as one of the best technical investors.
Rich dad said, “A well-trained technical investor invests on the emotions of the market and invests with insurance from catastrophic loss.
The most important consideration for selecting a good stock for investment is based on the supply of and demand for the company’s stock.
The technical investor studies the patterns of the sales price of the company’s stock. Will the supply of the shares of stock being offered for sale be sufficient, based on the expected demand for those shares?
The technical investor tends to buy on price and market sentiment—just like a person shops for sales and discounted items.
Many technical investors are like my Aunt Doris. Aunt Doris goes shopping for bargains and sales with her lady friends, buying items because they are cheap, marked down, or because her friends are buying them. Then she gets home, wonders why she bought the item, tries it on, and then takes it back for a refund so she can have money to go shopping again.
The technical investor studies the pattern of the history of the company’s stock price. A true technical investor is not concerned with the internal operations of a company, as a fundamental investor would be. The primary indicators the technical investor is concerned with are the mood of the market and the price of the stock.
The third type of trading—which I don’t think I’ve ever mentioned—is Quantum trading. It consists of trading strategies based on mathematical computations and number crunching to identify trading opportunities.
In the Information Age, quantitative trading seems obvious because you can create an algorithm to create a trading model which takes out the emotion that you see in technical trading.
Quantum investing has its problems too. Markets are dynamic, and no algorithm or person can predict 100% of the time what a stock is going to do.
The difference between the two investment styles is dramatic.
While all three types of investors invest from the facts, they find their facts from different sources of data. Also, all three types of investors require different skills and a different vocabulary. The frightening thing is that most of today’s investors are investing without any investor skills.
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 investor. The reason investing seems risky from the technical side is that stock prices fluctuate with market emotions.
Many times a fundamental investor will find an excellent company with great profits but, for some reason, the technical investors will not be interested in it so the price of the company’s shares will not go up, even though it is a profitable well-managed company.
During the dot-com bubble, many people invested in IPOs of Internet companies that had no sales or profits. That is a case of technical investors determining the value of a company’s stock.
In a bullish stock market, people who operate strictly as fundamental investors do not do as well as investors who also consider the technical side of the market. In a bullish market, people who take the most risk win, and people with more cautious and value-oriented views lose out. Many of the risk-takers frighten many technical investors with their high prices of stock without any value.
But in a crash, it is the investors with strong fundamental investments and technical trading skills who do well. The amateur speculators rushing into the market as well as all the new start-up IPOs flush with money are hurt in a downturn.
Rich dad said, “The trouble with getting rich quickly without a parachute is that you fall farther and faster. Lots of easy money makes people think they are financial geniuses when in fact, they become financial fools.” Rich dad believed that both technical and fundamental skills were important to survive the ups and downs of the world of investing.
The Confident Investor
One of the reasons that investing in stocks seems risky to the average investor is because she does not understand the difference between these two types of investing techniques.
More than likely, you’ve heard horror stories about others who have tried to invest but lacked the proper knowledge to do so—and the devastating effects it may have had.
But as always, knowledge is power. Rich dad used to say, “Investors need to be well versed in both fundamental analysis as well as technical analysis.”
With the right financial knowledge and understanding of both technical and fundamental investing, you can invest confidently, knowing you can make money whether the market is going up or going down.
Editor, Rich Dad Poor Dad Daily