Investment: Ask right questions
2 min readOct 6, 2023
- In what economic circumstances is the investment’s price likely to go down?
- Are other investments in your portfolio likely to take up the slack by gaining in those same circumstances?
- Under what circumstances could I lose a substantial share — 20% or more — of my investment?
- Under what circumstances could my entire investment be lost?
- Would I have any residual liability — that is, can I lose even more than the cash I invested?Interest rates generally reflect an investment’s risk. A higher interest rate means there’s a greater possibility the capital can be lost — through default or inflation.
- Under what circumstances, if any, is the investment likely to appreciate?
- Under what circumstances, if any, is the investment likely to depreciate?
- In good circumstances for the investment, will the overall return — yield plus capital appreciation — help your portfolio overcome losses in other investments?If the investment is a mutual fund, you want the fund with the lowest yield — other things being equal. Any dividend paid by a mutual fund simply reduces the price of your shares
- “Is this company a potential takeover candidate?” The crowd isn’t always wrong, but you can’t make much betting with it — because you will buy at a price that’s already high. By going against the crowd, you buy when an investment is out of favor and cheap; if it does succeed, there’s a long way for it to go up. So the most important factor in speculating is whether you expect something that most people don’t expect. For example, the time to consider buying inflation hedges speculatively is when most people believe inflation is under control. The time to consider buying a particular company is when everyone knows what a dog it is — not when everyone talks about its great promise. Unpopularity doesn’t guarantee profits, but you’ll never make a killing with a popular investment.
- “Do the technical factors favor the investment now?”
You must have an investment plan. Without a plan, you will be tossed and turned by all the conflicting ideas you read and hear- — and you’ll never ask the right questions. With a plan, you’ll have a basis for evaluating whatever you hear. You’ll know to ask the questions that help you determine whether an investment furthers your plan.