Not to Love and Not to Hate!

Never fall in love nor be hatred with a company’s stock. A stock is just a financial tool to help us achieve our investment goal, not our lover nor our enemy. People often make a mistake of sticking with a company’s stock for too long without periodically evaluating the underlying company’s fundamental strength, potential future stock price appreciation, and the economy condition. The infatuation is usually attributed to the fame of the company, satisfaction in the company’s products, past investment return with the company’s stock, or proud of being the company’s employee.

For instance, Citigroup was the biggest well known bank in the world before the financial crisis but it would have bankrupted if the government did not bail it out. Another example is Microsoft. Its products are omnipresent in every computer. Its stock made a lot of people a millionaire in 90s. Although the company still makes tons of money every year and it has billions dollars of cash equivalent securities in its account, its stock price has dropped more than 50% from 2000 to 2010. If I was a Microsoft investor, I would have been better off by selling the stock at the beginning of 2000 and put the proceeds into a bank saving account. The main problems of Microsoft were that the stock price was ahead of its fundamentals in 2000 and the company’s innovation was slowing down.

Conversely, hating a stock may make you miss a potential profit opportunity and it may be even worse if you are shorting it. Be neutral on a company’s stock; never love nor hate it. If you have a position in a stock, it is important to periodically evaluate the underlying company’s fundamental strength, potential future stock price appreciation, and the economy condition.

Why Must You Invest?

When people are asked why they invest, the majority would say “try to make money”. This is a typical and a very true answer. We all try to make money by investing. However, on the other hand, a more important and compelling reason is: Investing is to protect the value of our money.

It sounds very awkward; we invest because we need to protect our money? Yes, we need to invest to protect our money. In today’s world, I believe most of the people have heard about the word “inflation”. What does inflation mean? It basically means price increases in products and services. Almost all of the countries around the world have inflation each year, except Japan where has experienced deflation (opposite of an inflation) in the last 15-20 years. Some countries have higher rate of inflation, whereas others have lower rates. In US, the average inflation rate is about 3% per year, which is considered mild.

Now, what does inflation mean to you? Let say you have $10 today and the gas price is $2/gallon. Your $10 bill can buy you 5 gallons of gas. Next year, assuming the inflation rate is 3%, the gas price will be $2.06, and you can only buy 4.85 gallons of gas. Another year of 3% inflation will increase the gas price to $2.12/gallon. Your $10 today can only buy you 4.71 gallons of gas two years later. It doesn’t seem a lot of money, right? Why bother? But, if you have a larger amount of money, the impact will be more obvious. For instance, $100K can buy you $97K of today’s goods next year, and $94K two years later. In other word, your $100K will loose $6K buying power in just two years and the value will keep decreasing every year afterward.

In the above examples, we can clearly see that inflation is the fearful enemy of our money. It makes our money less value and erodes our buying power years after years. For this reason, we must invest our money. The minimum goal of investing should be having a return that at least matches the rate of inflation in order to preserve our buying power. You may wonder how and what you should invest in to keep your money’s power level. Fortunately, in today’s financial world, there are many different tools to help us fight against inflation. They will be discussed in the next articles.