How to Know If You’re an Educated Investor
In the world of investing, money is not lost. It just changes hands.
That’s why I am hesitant to tell someone what to invest their money in. If a person doesn’t know what to do with their money, they should first invest some time in financial education.
When I get asked the question, “I have $10,000. What should I invest it in?” I first say invest your time learning to be a better investor before investing your money in what you hope and pray is a good investment.
Many people seem to think that investing is simply throwing money at some hot deal and hoping to strike it rich, or just turning it over to a total stranger and hoping that stranger or that company returns your money to you someday.
Warren Buffett said, “The best way to get rich is to not lose money.”
The way to do that is to get smart…
How to Spot an Educated Investor
You can easily spot an educated investor by whether they can make money when the market goes up and down.
When markets go up, individuals who have never invested before will get into the market and start investing.
You’ll hear them say things like, “I have made so much money in the market,” or “I’m in early and the price has gone up 20%.” Those are often enthusiastic words of new investors, investors who have never lost in a down market.
When markets go down, the same new investors will find out what it feels like to make a mistake in the market. That’s when you’ll see who the real investors are.
As rich dad said, “It’s not how much your investment goes up that matters. It’s how much it can come down that’s most important. Real investors must be prepared to profit as well as learn when things don’t go as they want them to in the market.
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.
Fundamental Vs Technical Debate
Part of the answer lies in understanding the difference between fundamental and technical investing.
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.
For the technical investor, the most important consideration for selecting a good stock is based on the supply and demand for the company’s stock.
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?”
Isn’t That Risky?
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.
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 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.
The Confident Investor
I have noticed that most people let their panic about money defeat them and dictate the terms and conditions of their lives. Hence, they remain terrified about risk and money.
Emotions such as fear and doubt lead to low self-esteem and a lack of self-confidence.
In the early 1990s, Donald Trump was nearly $1 billion in debt personally and $9 billion in debt corporately. An interviewer asked him if he was worried. He replied, “Worrying is a waste of time. Worrying gets in my way of working to solve these problems.”
I’ve noticed that one of the main reasons people are not rich is that they worry too much about things that might never happen.
If you’re prepared, there is a deal of a lifetime being presented to you every day of your life.
With the right financial knowledge, 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.
Play it smart,
Editor, Rich Dad Poor Dad Daily