Investing paralysis - MoneySense

Investing paralysis

With so many variables to consider when buying a stock it’s easy to see why investors freeze when it’s time to make the trade

M A K I N G   B A N K

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Everyone is guilty of impulse-buying every now and then. That pair of shoes you’ll never wear, a fancy camera you never use or a Darth Vader costume that you used once that then caused you to question your life choices. (Ok, one of those impulse purchases didn’t happen, I’ll leave it to you to guess which one). Regardless, there is no question impulse buying is wasteful, but at least you can contain the damage. With investing, frivolous, spur-of-the moment purchases can cost a whole lot more. When you’re buying a stock you need to shop with clear purpose and a goal in mind.

Remember that time I bought Apple stocks with my practice account? That stock purchase was the fun, experimental antithesis to my smart, advice-backed Couch Potato portfolio. But now it’s just sitting there like the iPod nano I no longer use. If this was my real money, what would I want from it if I held it for the long term? And can it deliver on those expectations? Everyone knows that if you’d bought Apple stocks in the 80’s for instance, you’d have made a huge windfall (more than 30,000% not counting dividends to be exact). I don’t know if I would expect the same growth trajectory going forward.

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How much more can a company innovate, really? For the record, I’m up 4% since I bought those stocks. But is that really good? As I look now I see Alphabet, the parent company of Google, is up even more over the same period.

Over the long term Apple isn’t the top performer either. Looking back to the top big tech companies’ performance since 1985, Microsoft blows Apple out of the water with a 69,000% return (Apple’s stock was up 30,000% over that period.) Did I allow my own bias for Apple product influence my stock picking decision? Maybe. It’s something I’ll have to be more mindful of in the future. All of this is to say that perhaps I shouldn’t be so proud of my short term gain without any context or making proper comparisons.

Here’s the thing, fellow newbies. When you’re unfamiliar with hands-on investing, picking stocks to meet your goals feels like abstract art. What makes a stock good or bad for your portfolio? I guess it depends on your goals.

If for instance, I had a long-term goal for my portfolio, like retiring in 40 years, my investment choices would be different than if I wanted to make a few thousand dollars to save up for a down payment on a house or a condo.

You’d want value and long-term growth to meet your retirement deadline, whereas if you’re looking for a short-term windfall, you might want a stock that’s growing fast, but may not stick with it for more than a year. With that, however, comes risk.

In theory, it all more or less makes sense. In practice, it’s overwhelming. You can turn to the advice of experts-who-know-math-and-are-smarter-than-you like Norm Rothery, but even he advises his followers to do their own due diligence.

That could include looking up the latest data on the stock, like the price, the earnings, the price-to-earnings ratio, any latest news releases that speak to the success of the company, and so on.

But it’s a bit of a mind-meld, it feels like, to put all of those together to make a decision.

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The interesting thing about my practice account on Questrade, and surely other platforms, is that when you look up a stock, it provides a collection of press releases and news tidbits at the bottom about the company, which comes in handy. Neat.

Some stocks I’m eyeing are Dollarama (DOL) because I’ve heard about its massive growth, which might be an interesting bet for a short-term windfall. (By the way, MoneySense does NOT condone this sort of stock-picking tom-foolery if the funds are already earmarked for some other purpose. But if you can risk losing then pick away. For me, I’m just experimenting!)

Then there is Cascade (CAS), a MoneySense All-Star stock last year, which means when we conducted our screens it came through as being a good value buy  and as having a solid growth track record. Back in October when the All-Stars were chosen, the packaging and tissue company had a trailing 12 month P/E of 22. Today, its P/E is slightly lower at 16.7. It’s worth noting that a price-to-earnings ratio helps you gage the value of the stock. A ratio lower than around 10 is commonly seen as being undervalued and possibly a good deal, although that will vary depending on what sector the stock is in.

Another thing to remember when investing is that if you’re worried about how risky a stock might be, you can counter that with safer investments in your portfolio. Say, for instance, if I did go for Dollarama and instead of growing like crazy as it has been recently, it suddenly tanked, while I’d lose that portion of money, a good chunk of it would be in safer investments like that trusty Couch Potato. So, even if it’d be a setback on my millionaire goals, I won’t be broke as all heck.

Be sure to check back for regular updates as Prajakta leads us on a journey as she learns what it takes to invest her own money.