Investing: Science and Art
Investing is equal parts Science and Art requiring investors to use both hemispheres of their brain. Interestingly, the left side of our brain controls language, math and logic while the right is responsible for visual imagery and imagination. As an investor you're going to need both. You will use the left-side of your brain to analyze the financials and the right to unravel what is going to be the catalyst for your investment. The catalyst is the event that will unlock the hidden value of your investment and ultimately drive the share price higher. It is arguable that well rounded people make the best investors. Don't despair if you're lacking in one area or another; you can hire us to do the other for you.
The science of investing should be rooted in Fundamental Analysis, which is the dissection and scrutiny of a company's Financial Statements. These include the Balance Sheet, Income Statement, and Statement of Cash flows. The initial analysis will give an overview of the quality of a business then, if it is strong, you'll need to dig a little deeper. A strong financial company will make a good investment but only at the right price. Since price matters you'll have to decide what you're willing to pay for it and then add a discount if you want to make some money. Don't worry, you don't have to haggle with anyone. You just wait until the market goes low enough. That's the easy part; the hard part is trying to figure out what will be the catalyst that will unlock the value of your investment. Catalysts come in many forms such as a company deciding to pay a dividend, or increase a dividend. It can be more dynamic like a temporary depressed share price due to the loss of a plant to an explosion or temporary shutdown due to a natural disaster. A good business plans for these type of problems and will come out a surprisingly stronger company after overcoming them. So, use the right side of your brain to evaluate the Financial Statements and the left to find your catalyst to unlock the value. If you want to be a great investor, use both sides of your brain!
*Redwood Coast Financial Partners, an independent firm with securities offered through Summit Brokerage Services, Member FINRA, SIPC and advisory services offered through Summit Financial Group, an SEC registered investment adviser.
These are the views of Redwood Coast Financial Partners, and not necessary those of Summit Brokerage Services, Inc. and/or any of its affiliates and should not be construed as investment advice.
The information provided is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor.