Make Sure You Are Smarther than the Other Guy

When I was a young investor I told my dad I had a found a stock that I thought was greatly underpriced and that I could probably double my money quite quickly. My Dad’s first advice was to make sure I was smarter than the other guy. He could see I was puzzled by this comment so he began one of his famous teaching moments that usually just involved a series of questions. “Where are you going to get the stock?” he asked. I replied that I would buy it on the exchange. That answer did not satisfy so he repeated the question this way. “You can’t buy a stock unless someone else is going to sell it. So whom will you buy it from?”

Understanding that every stock transaction involves a buyer and a seller, I responded that I guessed that ultimately I would be buying it from someone who wanted to sell it. “And why does he want to sell it?” he continued. I began to see where this was going but I proceeded into my Dad’s trap anyway. I admitted that if someone felt the stock was about to go up the way I did, that they would not be willing to sell it. “So you want to buy it because you think it is going up, but you can only buy it if someone else, who thinks it is not going up, is willing to sell it.” After a pause he repeated, “Just make sure you are smarter than the other guy.”

Professional investors spend countless hours everyday studying the investing markets. Some analysts spend their whole lives following just a couple of stocks or bonds. I visit with these professionals daily and they always worry if they have learned enough. And then a person comes in my office, like happened last week, and says, “I heard from a guy at the store that I should buy XXX stock.” It is amazing how quickly, and on how little information, some investors will base their decisions.

Investing is like a school. As with most forms of education you have two options. You can learn now, or you can learn later. If you are going to be making investment decisions, you can do your homework, your research, your due diligence, and learn before you buy, or you can learn the lesson after you buy. The markets demand you learn your lessons but really don’t care when you learn them.

Remember that with most investment decisions there will be a buyer and a seller. You can be pretty much assured that the person on the other side of the transaction has done their homework. It is likely they have studied well, sought good advice, and perhaps have a great deal of experience in these matters. When you make the final decision to buy or to sell, the person on the other side of the transaction likely has come to the opposite conclusion. Just make sure you are smarter than they are.