The What, When and
How Much of Investing? (Part 1 of 3)
By Peter S. Iuvara
Some may say that the only advice
an investor needs to know is "buy low, and sell high".
While there are many necessary concepts of profitable investing,
this will be a nice starting point for our discussion.
"Buy low, and sell high" -- sounds
easy enough. It must not take a rocket-scientists' mentality
to figure this out. Well, the fact of the matter is that it
can be harder than it seems. After all, we all need help and
advice when it comes to something as important as our financial
When you hear the saying "Buy low, and
sell high", three (3) critical questions should race
through your mind. Questions of the utmost importance regarding
making the right investment decisions with confidence. The
What, When and How Much of Investing? So let us begin.
"The what of investing" will answer
the important question of what security to invest in?* For
this question I like to use a concept popularized by Benjamin
Graham and Warren Buffet known as Security Analysis. Security
analysis is the procedure of sorting through possible investments
based on values derived from fundamental analysis, and selecting
those securities which are currently mispriced. Once the "intrinsic"
value of the security is known, we can then compare that value
with the current market price. If the current market price
is lower than the companies "true value", then we
can assume the company is undervalued or oversold. In semi-strong
efficient markets, which is a fancy name meaning that almost
all public information is immediately priced into the stocks
price, we can expect the price of this stock to go up. The
exact opposite holds true for companies that have "true
/ intrinsic" values which are higher than current market
prices. The theory being that the stock price should fall,
because it is mispriced or overvalued. This is a successful
method for selecting those securities which are mispriced
and allowing up to narrow down several thousand possible securities
to a hundred of so.
Fundamental Analysis (Security Analysis) is
the first important step in, The What, When and How Much of
Investing, but we cannot stop here. We still have to answer,
the questions When and How Much. Be sure to check out Part
2, same time, same place next week. Make Profitable Investment
* Investor sentiment will also figure into
this decision, but it will be discussed in detail separately
in Part 3.