Investing or Gambling? Your Choice.

Buying Microsoft stock is a great exam­ple of the kind of invest­ing gam­bling indi­vid­ual investors should avoid, let me share why.

We’re afraid to make invest­ing mis­takes and lose mon­ey. Yet, when I speak to peo­ple about the Elephant’s Paycheck Blueprint, the con­ver­sa­tion even­tu­al­ly goes to a place where I’m asked my opin­ion on a spe­cif­ic invest­ment. Even when the per­son has only just met me.

I get asked about Microsoft a lot. Probably because I have a tech­ni­cal back­ground, and love Apple. One must assume peo­ple fig­ure that if I love Apple, I must have a strong opin­ion about Microsoft.

Considering Microsoft as an invest­ment, I have a poor opin­ion of Microsoft. Understandably, you may not agree with my opin­ion, and my opin­ion may not be rel­e­vant to your invest­ing strat­e­gy. That’s sort of why it’s my opin­ion.

Not one to be shy about shar­ing my feel­ings, peo­ple tend to respond with a very spe­cif­ic style of ques­tion:

You don’t like Microsoft? But I hear they’re going to come out with a new phone/tablet/­op­er­at­ing-sys­tem/game that’s going to change every­thing… Don’t you think the new phone/tablet/­op­er­at­ing-sys­tem/game will be great? Don’t you think a lot of com­pa­nies will buy them? ((Of course, this is only a slight­ly bet­ter line of ques­tion­ing than the per­son who says “It has­n’t gone up in a while, so it should go up, right?” Like there’s some sort of reverse law of grav­i­ty in the stock mar­ket or some­thing.))

The last few weeks have been very “inter­est­ing” from a Microsoft per­spec­tive:

1. They wrote off $900 Million Dollars of their crap­py Surface tablet
2. They ini­ti­at­ed a dif­fi­cult com­pa­ny-wide reorg, chang­ing the very nature of the way employ­ees will exist and the way they’ll take prod­ucts to mar­ket
3. Steve Ballmer “resigned” leav­ing the com­pa­ny lead­er­less dur­ing the mas­sive reor­ga­ni­za­tion that clear­ly requires a strong leader if there is any chance it will suc­ceed
4. They pur­chased Nokia’s mobile busi­ness, a busi­ness that was fail­ing and going to take down Microsoft’s mobile future with it

Guessing is Not Research

These com­pa­ny-chang­ing events are not some­thing an indi­vid­ual investor has any chance of antic­i­pat­ing. Perhaps the Nokia thing was fore­see­able. But know­ing when it would hap­pen, and how it would affect your invest­ment in the com­pa­ny is a whole oth­er thing.

For the rest of these events, maybe you can argue that some­one can make a good guess that some­thing along these lines should hap­pen.

Don’t think these sorts of events are always bad. Sometimes, com­pa­nies announce sur­prise div­i­dend events (as hap­pened with Spectra Energy ear­li­er this year). Or, they get good press that dri­ves the stock price up (as hap­pened to Apple last month).

It’s great to wake up to a 10% increase in one of your invest­ments. It’s a feel­ing that nev­er gets old! However, you can’t think that just because you hap­pened to buy before it hap­pens means you’re a “good investor”.

Are you sure you want to base your invest­ing strat­e­gy on “good guess­es”?

Remember, it’s not about being right, it’s also about hav­ing the right tim­ing. You could have been scream­ing that Ballmer had to go for a long time. Knowing it would hap­pen now, that’s a dif­fer­ent sto­ry.

Don’t Judge, Just Be Honest. Are You Gambling or Investing?

When you invest based on guess­es, you’re not invest­ing. You’re gam­bling.

This sort of thing is why you should think first of an invest­ing strat­e­gy, not an invest­ment deci­sion. Your deci­sions need to align to your strat­e­gy. If your strat­e­gy is to guess gam­ble that some­thing good will hap­pen, Microsoft may be a good play. They have a lot of mon­ey in the bank and great cash flow. Eventually they might do some­thing with all that mon­ey that makes the stock jump.

But be hon­est with your­self. If you invest based on hope you’re not invest­ing, you’re gam­bling.

No Hope Required

You should pre­fer invest­ing to gam­bling.

That means you should have a strat­e­gy that does­n’t require hope. Hope that the man­age­ment of the com­pa­ny you invest in (acci­den­tal­ly) make a good deci­sion. Your strat­e­gy should con­sid­er invest­ments based on how the com­pa­ny’s have man­aged their busi­ness in the past. Having con­fi­dence that the process/culture/discipline that got them to good deci­sions they’ve made in the past they will con­tin­ue.

Predicting the future is hard. When look­ing at the future, it’s best to con­sid­er broad trends not indi­vid­ual com­pa­nies. I can’t tell you if Microsoft or Apple or Google ((Blackberry who?)) will be the “best invest­ment”, but I will tell you that mobile is real­ly big.

Of those three com­pa­nies, which are like­ly to not do well based on past process/culture/discipline? ((Begging the ques­tion of what I think about Google. My answer? They don’t pay a div­i­dend, so don’t care about them for my Elephant’s Paycheck Blueprint strat­e­gy.))

A Good Strategy is a Long Term Plan, Even if the Actual Investments Change

The Elephant’s Paycheck Blueprint is a strat­e­gy based part­ly on math and part­ly on per­spec­tive.

It’s about invest­ing for a pay­check, and track­ing your rais­es over time. Picking con­ser­v­a­tive com­pa­nies that align with your social val­ues and have a long his­to­ry of div­i­dend increas­es. Companies that are con­sis­tent and mature at mak­ing deci­sions for their busi­ness. It’s about tun­ing out all the oth­er news noise, and stay­ing moti­vat­ed because rais­es are fun, espe­cial­ly rais­es that increase year after year. And hav­ing an extra pay­check from your invest­ments is kin­da cool (even if you’re not think­ing about retir­ing).

Even Apple is real­ly too risky for most of the peo­ple I expect to enjoy the Elephant’s Paycheck, because Apple are not a div­i­dend aris­to­crat. However, if you must invest in tech­nol­o­gy, have a look at how Apple com­pares to Microsoft over the past 10 years or so. Keep in mind, the past 10  years are prob­a­bly going to be unlike any oth­er in Apple’s future.