When studying an investment, it’s important to know where this type of investment fits into your overall investing plans. In other words, will you be making similar investments to this one in the future or is this only a one time shot? An investment that is of a type or style where you know you will be making more of in the future is more desirable than one totally outside of your plans that just seems like a hot tip.
Why is that?
You grow in wisdom as an investor over time, by learning from decisions and outcomes both good and bad. Especially bad. You’ll always learn a lot more from a bad investment than from a good one. You’ll spend a lot more time analyzing what went wrong with a bad one to determine that you don’t make the same mistakes again. It’s important that your assumptions are sound. Some people make overly broad conclusions when an investment goes badly, such as “real estate (or stocks, etc.) is a lousy investment, I’ll never invest in real estate (or stocks, etc) again!” The asset class is probably not the problem, but your understanding as an investor investing within that class.
Let’s say you make an investment that goes badly. You’ll spend some time thinking about it and growing in understanding about why it went wrong. If the new wisdom that you receive can be applied to future investments of the same type, then the bad one was simply a tuition that helped you be a better investor in the future. It wasn’t money lost, but money invested in your wisdom that will help you better steward your assets and investments in the future.
On the other hand, if you will never make another investment of this type, what good is the education that you received? Thus, an investment opportunity that is in line with future investments you intend to make is more desirable than one outside of your planned growth as an investor.
You can and should learn from investments that go well and this knowledge can be applied to future opportunities, but never allow yourself to think you’re too smart when an investment goes well. It could just be that you were lucky and the moment you start being prideful about your discernment is usually the moment that proceeds a bad fall (loss).
This is Part 9 in the series Investment Due Diligence. To continue with this series, click on Pt 10. To use this as a growth tool to better understand your own calling, you might start by reading Part 1, Pt 2, Pt 3, Pt 4, Pt 5, Pt 6, Pt 7 and Pt 8.
Photo credit: Vince Alongi