Investment sentiment: A balancing act

When I first started investing, the lure of high profits to be made on warrants was too much to resist. I transferred some cash to my warrant trading account, and thought that this year I’ll beat any fund manager who makes a feeble 25%.

Was I wrong! Within the first week I was trying to find a way to get out of the nightmare I was in. I bought MTN and Sanlam call warrants on advice from two of my “expert” friends. Soon I lost 20% - the companies did not perform as my excited friends thought, and the share prices did not jump as high as anticipated after the financial statements were released.

The substantial loss made me take a decision: I will NEVER again by on roomers or hints:

- I will never again use financial instruments I do not know well.

- And I will only buy what I believe, based on facts, to be a good buy.

I’m sure there are people that make money buying and selling on roomers, but to me, that is gambling. I’m someone who prefer working for my money to gambling for it. And from that day on I started doing homework before I bought into anything! In fact, I was amazed at how irresponsible some people (like I was!) could be with their God-given opportunities & wealth!

So before you start investing it is wise to notice that not only company profits and balance sheets affect share prices. Price:Earnings ratio’s and dividend yields are elements within a balancing equation that comprises only 4 variables: See illustration below:

When an investor considers putting money into a company or share, he is challenged with mixing these 4 elements into a success recipe. He will be greedy for the potential a share offers; He would be fearful of the risk associated with this investment.

The challenge is to first balance potential and risk: Can I risk loosing X for the opportunity to gain Y? This he or she can only do with a thorough study of the fundamentals of the targeted business. Once these calculations are done, the investor must take action. Often Fear will stop the process, even though the fundamentals were perfect. Or Greed will urge the investor to place an order which has the lure of great potential.

It may be wise to print the above little picture as a reminder to do you homework before you get caught investing only for greed or staying away only because of fear!