Ignorance Is Not Bliss

Part 1 of 10

I want to start by asking you a question. How long does it take an average person to become a millionaire? This might seem like a silly question, but the answer will give you a new perspective on how building wealth is less about your assets than it is about your asset management. The truth is “An average person does not become a millionaire.” To become a millionaire, you have to do the extra-ordinary; often times with average resources. You have to do things differently.

Applying the aforementioned statements to your situation, consider this additional question. “What stops YOU from becoming a millionaire?” In this series, I plan on addressing ten roadblocks that stop the average person from excelling at building wealth. I want to encourage you to recognize that we all struggle with these roadblocks. However, those who can overcome these roadblocks have a greater propensity to become millionaires.

So, let me begin with the most common roadblock of Ignorance. Ignorance is simply the lack of knowledge. Stupidity is the lack of application. The question that must be asked is “If every person knows that he or she should be investing, and he or she isn’t, do we have a stupidity problem or an ignorance problem?”

I believe the number one roadblock to successful investing is ignorance; ignorance of how to invest successfully, not whether or not one should invest. Knowing that you should be doing something and knowing how to actually do it are two separate things. Stupidity would be knowing how to invest and making a willful decision not to. Is it possible that most people do not invest because they simply do not know how to?

There is no easy way for an individual to become a financial guru overnight. However, with enough work, the average person can learn how to manage his or her own investment accounts. Learning how to invest strategically requires three elements: time, resources, and desire. You have to commit the time necessary to learn how to preserve the resources you have and not give in to the desire to exchange your future security for today’s pleasures.

Statistically speaking, most people are not prepared for retirement, let alone a major negative financial event. It is common knowledge to first, have an emergency fund to second, have as little debt as possible and to third, spend less than you earn. So, if you do not have an emergency fund, have high levels of debt, and spend more than what you earn, you cannot claim ignorance. You know better, but you choose to ignore conventional wisdom. That is not ignorance, that is just plain stupidity.

Have you ever heard the phrase “You don’t know what you don’t know yet?” I was once told that by a supervisor and, without even thinking, I snapped back; “I know what I know and anything outside of what I know that I know, I do not know. Therefore, I do know what I don’t know. The key is to seek after the knowledge of the things I know I don’t know so that I can know them.” Choosing to not learn something just because you know you do not know it is a back door to stupidity.

To overcome the roadblock of ignorance, as it pertains to successful investing, there are ten bits of knowledge a perspective investor needs to pursue, the depth of which cannot be adequately addressed in a blog. I will give you the macro-view and allow you to dive into the micro-view on your own. Remember, no one will ever plan for your future better than you and if you fail to plan, then you plan to fail. So, let’s get started.

1.     Understand the company. Knowing what the company does and how it makes money is very important. It is important to know how being a shareholder will impact your return on investment and taxes.

2.     Understand the P/E ratio. A high P/E ratio in relationship to the broader industry might mean the stock is more expensive even if the share price is lower than other companies within the same industry.

3.     Study the financials. Knowing where a company was is important, but knowing where it is going is the real key to making an investment decision. Since the economy is always changing, the historical data can only provide so much insight. You have to understand where the company is headed and understand how it plans on getting there.

4.     Understand the dividend cycle. Does the company pay dividends monthly, quarterly, semi-annually, or annually? Know when these payments are made can help you plan when to add a few additional shares at a lower cost.

5.     Understand the impact of dividends. There are three important dates to remember when holding dividend stocks. Those are the Ex-dividend date, the Record date, and the Payout date. Of these three dates, the most important to keep in mind is the ex-dividend date.

6.     Subscribe to investment websites. Before you become a shareholder, it is important to read about the company you intend to own. Beyond that, it is equally important to continue to stay abreast of the news surrounding the companies you own.

7.     Know the financial facts. You want to look for companies with a history of EPS (earnings per share), revenue, and dividend growth. The earnings per share and revenue growth are important, but the best companies often outpace the industry averages in these two categories.

8.     Get comfortable as a contrarian. This particular behavior will take years to master, but with good research, a person can learn when to be conforming and when to be contrarian. To master this behavior, a person needs to be able to look beyond the risk and see opportunity.

9.     Understand the value of arbitrage. Arbitrage is nothing more than the spread between the stock price and value of a company’s stock. This is where mergers and acquisitions, spinoffs, special or irregular dividends and stock splits can provide unique opportunities to investors.

10.  Know the market in which you trade. Most every trade happens in the secondary market. IPOs (initial public offerings) make up the primary market where the money used to purchase shares of a newly trading company goes to the company and its underwriters. When you purchase shares of a publically traded company from a broker, you are buying in the secondary market where supply and demand rule the trade.

11.  Bonus: Know the market influencers. While supply and demand can drive the price of stocks, keep in mind that shorts, options, and margin traders have a strong influence on the price of stocks. Increased activity on the part of these types of traders can increase volatility.

I hope this short post has given you something to think about concerning your financial future. You do not need to depend upon others to manage your financial assets. You can learn how to do it yourself. It’s going to take time, but if you are willing to do the work and preserve the resources, you can become a successful investor.