Understanding the Art of Investment

There are so many investment advices, a beginner investor can easily get confused. Newspapers, radio shows, Web sites, newsletters, seminars, books, magazines, TV shows and entire TV channels are dedicated to give investment advice.

However, investment gurus know that investing is more an art than a science. There are so many variables that make an investment profitable or not, that it is not possible to elaborate an universal model for predicting the ups and downs of the market.

While knowing that the success or failure of your investment may depend on factors far beyond your reach it is not a good approach to leave everything to chance. You should be looking for value when investing, and continuously educate yourself.

Value investing was proposed by Benjamin Graham in the 1940s. Graham said that people usually see the stock market as a popularity contest. However, a smart investor views the market as a set of scales. There may be sudden falls and takeoffs, but on the long run, the true value of a stock will be mirrored by the price.

There is a difference between investment and speculation: those who make their homework, study closely how a business works and what is its financial condition, can invest their money with minimal risks. But if you buy stocks just because everybody does, and you have no idea whether the company’s finances are in good order, you are speculating.

Those who look to make fortune invest in companies that have good prospects for the future, and they also have patience because they know it takes a while for them to realize any profits.

A quick and easy way to assess the value of a stock or mutual fund is to check out the price-to-earnings (P/E) ratio. This means the price of a share of stock divided by its

earnings per share for the past 12 months. The rule is that if the P/E ratio is more than 22, the stock may be overvalued at the current market price.

There are also a wide range of resources available today about the way markets work. It is OK to be a “know-nothing” investor, but it is always better to make some research before making any decision. You don’t have to become an expert, just learn as much as you feel comfortable, and don’t be afraid to keep things simple.

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