When investigating possible opportunities in the marketplace, the thing that gets most fund managers every time is capital appreciation and the forecasting of future earnings and growth. When fund managers need to take equity positions in marketable securities they tend to pick stocks that they think or heard will rise in the future. They weigh all public information about the company currently known plus its future progress based on current knowledge and economic conditions.
In order to acquire capital, fund managers and financial planners/analysts persuade prospective investors by enticing them with past fund performance, niche sector security picks or some other sort of methodology (all of them are based on buying and selling securities in the open marketplace and charging you a fee on the total value of your investment). Once they have capital, the guessing game begins. It didn’t matter that you wanted to invest in a balanced growth financials fund, the managers buy and sell securities based on immediate gains. They don’t invest in the business of the stock or the methodology of the fund, they invest for capital appreciation and how quickly they can get a return. They treat the stock market like a cold shower, quick in quick out.
The best stock is one that is not just priced low, consistently earns and yields a lot but that stays low for a long time. This way, you could continue to invest more capital into the stock over time. Invest your capital, achieve a decent annual yield, and then have your principle returned, much like bonds. These stocks do come around, the problem is it may take 2 years before its time to invest in one. Sitting-on-your-ass investing is hard because of the temperament needed. It’s boring. It is much more exciting to gamble and predict stock prices then to gain unstimulating average market returns and waiting for a good opportunity.
An example. Say you inherited $500,000. What do you do with it? Well, if you decide to invest all of it, how do you invest? There are two ways. If you are risk averse and are more of the defensive investor type, you would invest all of it in a low fee index fund and never touch it again. In fact, you would keep adding to it over time. If you are more of the enterprising investor, you would invest in treasuries or some other highly liquid, short-term, high rated security until an oppurtunity for investment came along. This way, you achieve a certain, mind you much lower, annual return on your capital but you will be liquid when a very good investment appears and you need capital.
This is the only way to do it. Everyone else loses money. No one achieves above market returns for any significant amount of time. If you invested in a stock, and it sky-rocketed, and you achieved a 10000% return on that one security in a short amount of time, you will seem like you know everything. You’d become over-confident and think anything you touch would turn to gold. You can predict stock prices! Then reality sets in and you lose all your gains because you thought, based on capital appreciation, that you could forecast expectations with a high level of confidence.
In reality however, the best securities that beat the market do show up, but only once in a while. To think that every morning you wake up and think your going to pick the next cash machine on the exchange is incredulous. Sitting-on-your-ass investing, picking few stocks and investing a lot of capital when the time is right and not expecting or predicting the appreciation of stock value is the best way to achieve adequate returns on capital. You won’t be disappointed.
U.S. Business Investor Funds and Services 