Source: Cartoons by Harley Schwadron
Personal finance and investing is a lot like pharmacy school.
You start off at the bottom, with introductory chemistry classes. With each continued semester, you build upon this foundation by increasing your knowledge in a step-by-step process. You progress from basic inorganic chemistry, onto organic chemistry, biochemistry, pharmaceutics, medicinal chemistry, pharmacokinetics, and so on.
With continued learning and persistence you eventually reach your goal: graduation. You’re now capable of practicing your craft in the real world.
These same principles can be applied to become a successful investor.
First, you build your foundation through learning the concepts of personal finance. You learn about budgeting and frugality and take steps towards reducing spending and eliminating unnecessary debt. From there you progress into saving and creating an emergency fund. Once your income continuously exceeds your expenditures, and you’ve created a buffer to cover any unforeseen circumstances, you’re ready to progress into investment.
With continued reading, you’ll learn to evaluate the many vehicles used for investment purposes, such as 401k, 403b and 457 plans, IRAs, brokerage accounts, and more. You’ll progress into the intricacies about annuities, mutual funds, stocks, bonds, commodities, and other investment options, and if they’re appropriate for your individual circumstances.
With time, you’ll start to learn your tolerance for risk, develop your own investment style, and begin to create an investment portfolio. You’ll learn to trust your instincts and gain confidence in your decisions.
You’ve graduated.
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So, what do you do after you graduate?
In my case, I carry no debt, have a few assets and own my own home. I’m not rich, but I’m insured, have an emergency fund in place, cash on hand, and contribute the maximum amount into my retirement plans. I’ve even created a charitable gift fund in order to give back to my community.
So, what’s next?
Realizing that over 80% of high-fee, actively-managed mutual funds under perform their respective benchmarks, I invest the bulk of my portfolio passively, in low-cost index mutual funds through The Vanguard Group, using the principles of Modern Portfolio Theory and asset allocation.
I also buy into Burton Malkiel’s Random Walk Hypothesis and Eugene Fama’s Efficient Market Theory, however I don’t believe that the markets are as quickly transparent as suggested.
So, using a small portion of my portfolio, I do attempt to profit from that narrow window of opportunity by trading in individual equities.
Yes, I speculate on stocks.
We’re all aware that market speculation is risky, and some investors even consider it gambling. However, I believe that speculation should not be considered purely a form of gambling, as rational speculators do make informed decisions before choosing to acquire the additional risks.
To accomplish my speculative goals, I don’t limit myself to only one type of analytical discipline. I’ll evaluate potential opportunities based on varied aspects, but will attempt to limit my risks using fundamental analysis.
You can usually find me following the markets with a contrarian point of view and evaluating arbitrage opportunities, searching for cigar butts, wallflower stocks and other undervalued equities. Experience and intuition will factor into my decisions, so I’ll also attempt to capitalize on market psychology and trends caused by investor behavior.
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Why do I blog?
Blogging about financial topics is in my blood. Like Mr. Earl, it’s my way of paying it forward and I enjoy it. Taking control of my finances and investments has empowered me and I’d like to share it with others.
You can expect me to post news, information, ideas, and commentary pertaining to personal finance, investment, the economy, and the stock market on Guzzo the Contrarian.
A healthy dose of skepticism and satire is often warranted when it comes to Wall Street. It makes for great blogging entertainment, so be prepared for frequent contributions on my part. I’ll also throw in a little of my own brand of irreverent humor “prn”.
