Common Sense Investing

Quick, I want you to learn everything about every different handball player in the world.  I need to know their stats, how these stats have changed over time, and how they are affected by their competition.  I want you to become so knowledgeable about these players that you are willing to risk your financial future on picking who will be the world's best handball player next year.  This seems like an absurd proposition doesn't it.  You are probably thinking, "First I'm an investor, I don't even know how to play handball, and I don't know what stats to look for."  There is no way most readers would be willing to risk money on this sort of a wager.  Yet, we are all willing to throw money at the latest tech buzz even if we don't understand what their product is, let alone how the business will increase shareholder value in the long term.

Like many of our readers, I would still consider myself an investor in the making.  I didn't really gain an interest in the markets until about two years ago.  When I did, I found it extremely difficult to start.  You need to learn about all these ratios, all the thousands of public companies, and you need to become so confident in this information as to wager money on it.  I was simply overwhelmed until I read Peter Lynch's One Up on Wall Street, which I still believe today has provided me with the best investing advice I have ever heard.  Instead of trying to buy into a hot company like Cyberonics simply because you have heard talking heads on TV hype it up, look around at what you see everyday.  Invest in what you know, and if you can't draw a company's product with a crayon, you shouldn't invest in it.  This summer has brought up some great examples of what he calls the power of common knowledge.

I wrote an article back in early June calling this summer's market to be the I.O.U market, meaning interest rates, oil, and uncertainty.  I went on to state that with the markets being confused by how to interpret these uncertainties, it could be a difficult time for young investors to get their start.  Looking back, (and vision is always 20/20 from this perspective), I think I should have called it the summer of common sense.  First, let's look at the oil situation.  Referring back to our basic microeconomics classes, we know that because the supply of oil is lower than the demand, price has been driven up. While some of them have fallen of late, most oil refiners, which help increase oil supply, saw 10 to 20% increases in their stock value between June 9, 2004 and today.  Even given the recent pullback, these stocks have certainly outperformed the S&P500, which is down 4% over this period.  This increase in oil prices is also a sort of inflation.  A major hedge against inflation, as well as the recent decline in the dollar, the slow down in the economy, and the widening trade deficit (all of which have been pretty apparent news), is gold.  One major gold mining company, Newmont Mining, is up 13.6% over the aforementioned period.  Another example that you couldn't have missed is that it has been a rather cool summer.  For example, in my home town of Pittsburgh, we are yet to have a day above 90 degrees.  This bad weather, combined with high interest rates and rising oil prices, have hurt the boating manufacturers of late.  For example, West Marine Products is down a whopping 28.6% since June 9.  I will give one final example for those of you who, like myself, haven't made it out of the house of late to notice the bad weather because you have been consumed by the recent release of Madden 2005.  Electronic Arts is up 5% in the past 10 days.  So, next time you're looking to buy a stock, don't go chasing the latest buzz.  Instead, look around into economic trends and what products are popular, and then get into all those ratios and statements.  It will save you headaches, time, and most importantly money.