Investing 101

The Simple Indicator Investors Must Watch

Investing is simple. Not easy.

There’s a very important distinction between the two. Particularly in light of what’s currently unfolding around the world.

A few years ago, I was listening to a gentleman probably 20 years older than me talk about how his guitar lessons were going.

He was intelligent. He was well-educated and successful.

But when he was a boy, his family pushed him toward the sciences and engineering. Now, he ultimately built a lucrative career out of those. The problem was, for him to achieve that success, his family kept him away from anything having to do with the arts – music, painting, etc.

It wasn’t until later in life that he decided to take up guitar.

“It’s very frustrating,” he admitted after three years of playing. “I thought I’d be better by now.”

All of his other successes – his aptitude for science and math, his mountain of professional accomplishments – made him feel invincible. These successes made him feel like everything would come easily.

He figured that if he read voraciously about music theory, he would pick up a guitar and, magically, be able to play like Wes Montgomery or Stevie Ray Vaughan.

He didn’t expect to put in the same amount of hard work that had been required in his professional life.

I often feel this is the same mentality people have when they start investing.

They think it’s easy. Deceptively so.

They believe they’re going to become millionaires overnight.

And I believe a lot of the frustration – including claims that the markets are rigged or unfair – spawn from this idea that individuals can just jump in and instantly be successful.

Investing is simple… but it’s far from easy. Being able to understand the importance of one indicator could be the key in this hazy environment.

Easier Than Delivery

Buying shares of a company online is less complicated than ordering a pizza.

You just enter the ticker symbol and how many shares you want, and press “submit order.”

It doesn’t get much simpler than that.

But buying shares of a good company – an investment that’s going to generate strong income and/or life-changing returns?

That’s far more difficult.

Investors need to understand the difference between good and bad valuation metrics.

They need to know whether a company’s growth opportunities are solid.

Whether a company’s revenue and earnings are beating expectations.

And if management is intelligent and overcoming the challenges that dog its competitors.

The list goes on and on…

There’s a lot to consider.

And even if it all looks perfect – everything is in tune – a black swan event can swoop in out of nowhere and force a great opportunity to go belly up.

That’s what the COVID-19 pandemic is inflicting upon whole swaths of the market as we speak.

It’s how investors respond in moments like this that determine whether they belong at the “novice” table or they’re able to step up and join their more seasoned counterparts.

The Simple Indicator Investors Must Watch

We are in unprecedented times.

Take a moment to appreciate and understand how much uncertainty is out there.

When will Americans get back to work? When will they be able to safely leave their homes?

The markets have suffered dismal declines and near-euphoric rebounds over the past month.

They’re bifurcated and seem almost broken, desperately searching for direction.

And for the broader markets, a much-needed compass might not appear anytime soon.

Remember, we’re diving headlong into first quarter earnings season.

We know it’ll be far from good. Borderline apocalyptic. And over the next several weeks, most companies are going to withdraw forward guidance.

They must.

They don’t know the scale of the impact COVID-19 is going to have on their businesses.

The economy is shut down.

That means there should be zero guidance.

And therein lies the problem.

Markets hate uncertainty. They fluctuate on a lack of clarity.

And when the level of uncertainty is high – as it is now – the likelihood for mistakes increases exponentially.

But there is a telltale sign of confidence investors can turn to: insider buying.

Company executives and directors must disclose when they purchase or sell shares.

These moves can provide some light in dark times.

These insiders know better than anyone else how their companies are faring.

So, during times of uncertainty – when no one knows how much of an impact the economic shutdown is having – following the moves of insiders is one of the best windows into a corporation’s health.

Ignoring the broader markets and simply focusing on individual companies can help eliminate questions of whether investors missed the bottom or are buying at the top. And insider actions can provide even more insight into this.

Now is the perfect time for investors to add this indicator to their investing toolkits.

When watching great athletes, great musicians and even great investors, we often fail to appreciate just how much work went into honing their skills. The thousands of hours they spent practicing and training – repeating it all, again and again.

These individuals don’t view failure as a setback or disaster. It’s a moment to learn and grow.

No one waltzes into the markets and instantly becomes the next Warren Buffett or Benjamin Graham.

But if investors take the time to study their philosophies and learn from their own missteps – if investors adapt their strategies to the changing environment, as insiders do – there’s no reason they can’t be successful.

Buying shares of a company is far simpler than learning chords on a guitar. But learning how to be consistently profitable takes far more years of practice and a more diverse set of tools. And this is something serious investors shouldn’t shy away from.

Here’s to high returns,

Matthew