My father inspired me to invest in stocks. He was a New Yorker, so we called him Pop. Well, Pop figured out at a young age that scraping by on an employer’s measly paycheck was a losing proposition. Hard work for someone else’s benefit only shortchanged yourself.
So with great focus and determination, Pop educated himself on the stock market, reading books by the likes of Ben Graham and Peter Lynch to develop an investment strategy, and carving out time each day to find the right stocks to build and grow his portfolio. He was so successful that he became a millionaire.
The lessons he taught have served me well in my own investing, so I wanted to share what I learned with you.
Value is the key
First, let’s look at Pop’s investment strategy. He came from the Warren Buffet camp of investors who believe in the concept of value investing. This is the strategy of finding stocks that are undervalued by the market. Cut from the same philosophical cloth as Buffet and Graham (they all shared a mindset of being thoughtful about how they spent their money), it’s no surprise Pop adopted this approach.
I, too, have adopted this investment strategy, and it’s proven to work exceptionally well. I bought Yelp (YELP) in the $20s and sold in the $80s. I did the same with Disney (DIS), Microsoft (MSFT), and a host of others too numerous to list. As you can see, these are not obscure companies that no one’s ever heard of. It’s amazing how many bargains you can find if you actively search for them.
Do the research
So how do you find undervalued stocks? You have to perform research. Sound intimidating? Well, when Pop was building his investment portfolio, the Internet didn’t exist. He would take frequent trips to the library to research stocks. He had to read through investment publications like Investor’s Business Daily and spend hours to complete his research.
Today, the same info is easily found in minutes on sites like Yahoo! Finance. What took Pop hours can be accomplished on command in the palm of your smartphone-powered hand.
Given the ease with which we have it today, there’s really no excuse to avoid digging into a company’s financials and management strategy to determine if they are a buy. It’s the only way to find and identify the stocks that will allow your investment to successfully grow.
Eye for the long term
Speaking of growth, in contrast to how quickly research can be done today, an undervalued stock’s price can take time to rise.
Like Buffet, Pop believed buying stocks meant owning a piece of the company. As such, if a stock is undervalued, it makes sense the share price can only increase as the company proves its true value.
The catch is how long this can take to happen. It could be at the next quarterly earnings report or years down the road. So when buying undervalued stocks, you’ve got to factor in the time component. Eventually, though, these stocks always pay off for the canny investor.
Dividends can help
Since there’s no telling when a stock’s price will rise, Pop gravitated towards companies that offered a dividend. And why not? You get paid while you wait to sell. It seems like a no-brainer strategy. Or is it?
In general, investing in stocks with a dividend is a great strategy. That said, stocks like Google (GOOG) and Amazon (AMZN) have never offered dividends. But if you had invested in these companies years ago, you would have achieved amazing returns.
So what I learned from Pop here is that if you find an undervalued stock and it offers a dividend, view the dividend as added value. But don’t let the lack of a dividend stop you from investing in a company with lots of upside.
Pop watched his stocks daily. Before the Internet, he did this by turning on the TV and watching financial news where they would flash ticker symbols along the bottom of the screen.
He had to watch carefully or he could miss his stock zip by. It wasn’t easy but he did this diligently. It’s the only way to know when to buy and sell.
Today, it’s no different. Sure it’s easier to look up a stock and know its share price instantly. But you still have to monitor every day, if not several times throughout the trading day.
Is the stock trending up? It may be time to sell. Is the stock going down? Perhaps it’s best to buy more shares. Windows of opportunity are missed if you’re not watching your stocks frequently and consistently.
The last word
By following the formula above, Pop gradually grew the value of his portfolio over the years. Even before he was ready to retire, his dedication to investing resulted in his being able to proudly tell me he was a millionaire. Now that’s the kind of hard work worth investing in.
Robert “Izzy” Izquierdo was inculcated into the church of finance by his investor father (who achieved millionaire status through stocks). Izzy has bought and sold stocks for decades. As a technologist who has worked at Silicon Valley companies to tech startups, Izzy pursues his dual passions of digital domain expert by day and Wall Street wanderer by night.