What is the best way to invest?
No question about it, the best way to invest is in the stock market. History
has shown that the best returns come from stock market investing. That
is because stocks are able to appreciate in value as companies grow. There
is constant daily adjustment to valuation as investors digest the information
that is available and as they assess the effect of the news every day on
the outlook for growth of a company. Bonds don't give you that kind of
growth. Bonds will give you a fixed return as long as a company is able
to maintain their good quality credit, but they won't give you anything
over your initial principal, except for that interest. Whereas with a stock,
if you pick the right one, you could double, triple, even quadruple your
money. It is unlikely that every stock you chose to invest in will do as
well as those few, but over time there is no doubt that the best way to
invest is in stocks.
How do you know when to buy and sell?
That is something that is difficult to put into a formula, but I would
say that there are certain characteristics you can look for. For example,
I think the best approach is to identify good companies in good businesses,
a good business being one with a lot of recurring revenue, or a product
that is protected, a proprietary position, a franchise that is unique,
so that competition is unable to duplicate it. Another variable that I
look for is an inflection point of change. It could be something that is
changing inside the company, or something that is changing outside the
company. Inside the company, it could be an acquisition, or a change in
the growth dynamics for one of their products. Externally, it could be
a change in regulation. If you catch the stock at that inflection point,
that's where you get the big move up in the market multiple, and that's
where you get the swings in the margin. So, if I could put it in a formula,
the best one I could come up with would be "a good company in a good
business at an inflection point of change".
Why does it sometimes make sense to sell a stock short?
Companies face changing industry dynamics, as well as unique challenges
from time to time. The stock market reflects all of the bad news, as well
as the good. A stock sometimes faces a period of 1-2 years of revaluation,
as investors digest the importance of negative news. Investors can profit
from this in an aggressive portfolio. Still, I must emphasize that short
selling is an inherently risky strategy that is only for the most aggressive
portfolios.
How did you get your start in investing?
You know, I went to business school at Columbia University, and when I
started I had no idea what the stock market was or how to buy a stock or
even how to think about some of the issues affecting investing. But I began
to go to the library and I began to read the Wall St. Journal every day,
and what I noticed is that it all came together in the stock market pages.
Whether it was war, the economy, even the weather, all of the excitement,
all of the growth, all of the change, is reflected in the stock market.
And that's what got me going.
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