Tim recently showed interests in making money from stocks and that was the topic
during this Sat's hike. In less than an hour, we came up with five models.
The first was Forest's style, refering to Forest Gump's success in buying into
the "fruit company," aka Apple Computer. Tim told me about how Shaq O'Neal got
a tip from his baby-sitter to buy Google early on. We both agreed that these
were insanely lucky cases on the same level of winning the lottery.
Second, there was the popular hot-stock model, where one identified trendy
stocks and tried to buy low and sell high. Timing was critical as difficult.
Some got rich this way, although I was not sure how sustainable the strategy
was.
Third, the Warren Buffett (or Peter Lynch) method, i.e., value investing. One
peruses financial reports of public corps and purchases undervalued businesses.
This involves a huge amount of research and skills in evaluation. Of course,
with faith and capital, one can simply buy Berkshire Hathaway stocks.
Fourth, the dividend or dividend-growth model. The basic insight is that a
company's dividends reflect its true financial health and no accounting tricks
can hide regularly paying out cash to investors or failing to do so. It could be
boring, however, as one may have to hold for a long time before being able to
sell at a profit and, meanwhile, the dividends feel meager with a small amount
of capital which is common for starters.
Last, trading. The trader has a few price-predicting and timing tools with
the discipline to stick to them. For example, he does not hold onto
shares when his models say sell, even if he has to sell at loss or has a
gut-feeling that the price is still going up. The game seems especially
psycological as one has to conquer his own greed and fear and maybe understand
mass behaviors.
There is a wealth of literature on investing. I myself have read O'Higgin,
Graham, Paul, Munger, Lynch, Weiss, and Wright among others. It makes sense to
me that one needs to acquire the knowledge of multiple models and practice the
one most suitable to his temperament.
