Cycles
It can be said that the whole world moves in cycles. Whether you're talking about the weather or different investments, there is a predictable succession of high periods followed by low periods, hot times followed by cold ones, and good times followed by bad ones. When they think about investing, many people think the trick to becoming a successful investor is to only invest at the bottom and sell it at the top. While that sounds good and simple, it's hardly ever achievable by the vast majority of people for a couple of reasons. One, it is our very human nature that puts us at a disadvantage in attempting to follow that plan. Like it or not, we are emotional beings and investing and emotion don't mix. Typically when a certain investment is near or at its lowest point, which by definition would be the best time to buy it, general fear regarding that investment is at an all-time high. Why would you take your hard-earned money and use it to buy something A) that nobody else is buying, as evidenced by its low price, and B) that has been going down in value over an extended period of time and looks like it's going to zero? This is the conversation we have with ourselves when considering that investment. As a result, most people don't buy at the bottom because they're afraid.
Conversely when everyone on TV, social media, and in your immediate circle of friends and family is talking about how much money they made on a certain investment, you want to get in on the action! If everyone you know of is making money, why not you? Better get in now before it's too late! You can probably see where I'm going with this. Many times this can be the absolute worst time to buy because the investment may have become overvalued by the time you heard about it and the people who got in early start to sell, which puts downward pressure on price. Late buyers who were expecting a quick buck might see things starting to slow down so they sell before its too late, putting more downward pressure on price. Things have leveled off and start to decline, now everyone who bought for no other reason than to sell it at a higher price all start to head for the exit, and the cycle continues. Who's left at the end of that? The people who had a better reason for buying it in the first place and don't care about short term price fluctuations.
This leads me to what I believe to be the best strategy when it comes to investing that removes our emotions from the equation which protects us from ourselves. The first question I believe you should ask yourself when considering an investment is, "Do I understand it?" I've intentionally kept this broad because I want it to be as applicable as possible to a wide range of investments. If you're looking at a stock, first of all, do you understand how the stock market works and what influences prices? If you do that's a good start, if you don't, either learn more about it or if it doesn't interest you, move on. Next, do you understand what the company does and do you believe in their business model or product? If you do buy it and have a plan for how long you want to hold it. If you don't, learn more about it and if you don't like it, move on. The reason is simple: if you buy something you hate and the value declines, you're much more likely to sell it. If you buy something you like and the value declines, you might even buy more because it's "on sale."
The second question I think you should consider with an investment is whether or not it pays you to own it. This is commonly known as cash flow. If I buy something that pays me regularly, I'm MUCH less likely to care about its fluctuations in value. It's for this reason that of my stock market investments, most of them are high-dividend paying stocks of large, well-known companies. I don't care the least bit about the share price because the dividend is steady. I didn't buy it to sell it for a higher price, I bought it to pay me regularly.
This is the main reason why I love real estate. I understand it, I like it, and I'll only buy real estate that cash flows. Not only does this protect me from my own emotions, but it also protects me from market cycles. The key to buying real estate isn't just buying at the bottom, it's buying at all stages of the cycle and HOLDING it. The key to buying at all stages of the cycle is to know more or less where you are in the cycle and adjusting your strategy accordingly. If you feel like you are at or near the top of the cycle, it's probably not the time to be aggressive in your acquisition strategy. Patience and discipline will be rewarded.
