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?1

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 Google2 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?3

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.

  1. 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. 

  2. Blackberry who? 

  3. 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. 

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