Over the years, I’ve found a key to sound investing I sum up in one word.  Understanding. Understand why you are invested in something. Understand the true value of what you are invested in.  Understand the reason the investment is sound and the return potential.  Understand the risks of the investment and your tolerance for risk and volatility.  Understand when you understand it well enough.  Understand when you don’t.  Research it to validate your investment understanding.  If validated, invest in the long term.

This is rare rigorous approach I actually seldom see with most investors I’ve come across over the years.  But this rigorous commitment to understanding is an obvious trait of mine to investors that know me and value both my opinion and diligent research.

Warren Buffett said he did not invest in technology because he did not understand it. Obviously there were and are great investments in technology but he chose to avoid them. A lesson on the internet boom and bust can also be summed up with words from the oracle of Omaha, …“as happens in Wall Street all too often, what the wise do in the beginning, fools do in the end”.  Some of you have experienced what can happen when you do not understand your investments.  With the research you get, you will understand the investments selected here.

Of course many younger investors had never even seen a market pullback and thought 401K was the purity of gold they would buy with the high fliers. They demanded that high flying sector funds be added to their portfolio of ‘retirement’ funds. They did not understand that their internet fund was full of two winners and two dozen wealth destroying dogs.  They did not understand that the fund had to limit the two winners and even had to constantly sell the winners to buy more of the dogs.  Many still don’t understand that hidden dilemma in many funds.  Many others perhaps embarrassingly, or gratefully, JUST NOW understand it.

Now it certainly didn’t help to have unethical people hawking these investments for reciprocal favors.  But by understanding the investment, the wise investor could avoid the hype even if the hypesters hawked it all day and night.

Now to the simple question of understanding I add the following….If you are an aggressive investor you need to REALLY UNDERSTAND.

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