I am having trouble understanding long-term investing
Hey, amateur here. I've got some questions.
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What do most people use to actually buy/sell the stocks? Online brokerages? I have seen countless threads on this, but I can't determine what the best method is. Do big companies have in-house brokers?
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I am having trouble understanding the underlying principle of long-term investing. Say I buy x shares of a nice company I want to hold onto. Okay, so I have it. Now I find another company later that is a good long-term buy as well. But where do I get the money to buy some new company stocks without selling my old ones? Do most people use their income or what?
This even applies to a hedge/mutual fund. Forgive my naive question, but when a hedge fund wants to buy a stock of a certain kind, does it sell some good ones it has or buy them with another source? Where does the influx of money come from? Really what I am asking here is, if someone is a long-term investor (professional or not), and they want to buy more stock, is the only way to get more money to invest with using a chunk of their income?
If the fundamentals of long-term investing say to not sell, then I am confused as to how one can reinvest any of it! Without dividends, long-term investors have no liquid cash unless they sell.
Please explain. Thanks.
1) yes, most individual investors use online brokerages
2)well generally speaking you can allot a certain amount of money you have to invest, and then have certain portions of your portfolio allocated to each position--say you have $10,000 of disposable income that you want to use to invest (i say disposable because investing obviously has downside risk--so you have to be ok with losing a substantial portion if you are incorrect), and you like the prospects of a certain company, but it could be risky...you dont HAVE to allocate all of that cash towards one single position, and can instead keep some cash on the sidelines for other potential investments. You can also always add more cash to the portfolio of course. Long term investing does NOT mean to never sell, but to wait to sell until your stock has reached what you determine to be the "fair value". at that point you could sell the stock, and allocate the money elsewhere. Some people argue against putting all your eggs in one basket, and rather say that you should diversify, or even hold a substantial portion of your portfolio in cash if you do not see enough solid investment opportunities
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You're not expected to know everything, if it were that easy, we'd all do it.
On the other hand, I don't understand it either. When Warren Buffett set his partnerships a long time ago that outperformed DOW by large margins it was apparently his full time job. But if he had under a million to manage and generally held on to stocks for awhile, then there must have been other stuff going on. If you a pure long-term value investor, it would be true that you hardly have to do anything but sit back for a few years and then sell after awhile. However, at least in my opinion, most value/long-term investors do trading and stuff with some sequestered cash in the portfolio.
In addition, it seems that many famous value investors hold onto companies and literally never sell them. But in order to continue to invest in new ones, they probably buy bonds or something like that in order to have a steady supply coming in. A portfolio of all stocks would not earn anything but dividends (in cash). Bonds and such could be used to earn money and reinvest it. I'm sure Buffett holds a large amount of bonds and other securities in a cash account just so he can make a lot of cash to reinvest without selling prized shares of Coca Cola etc.
Or perhaps leveraging by borrowing in one way or another.
The hard part is figuring out all of this and setting up a plan. And of course you probably would need to start with a minimum of $10,000 to get things moving as a personal investor.
Read the Intelligent Investor by Ben Graham.
Basically, most buy/hold investors consider themselves value investors, which means they follow the principle that you only invest in companies that are currently trading at a value that is less than its intrinsic value. By doing relevant analysis and necessary due diligence, you should be able to come up with this intrinsic value, and if you are so sure that you have a company to invest in (search: margin of safety), then you put an allotted amount of cash into the company and wait until it hits its intrinsic value. As a value investor, you aren't worried about short term fluctuations or technical analysis etc. You are investing based on the idea that the company is fundamentally undervalued, and the market will eventually rationalize itself to correct this error.
Now, if you have done some good analysis, then this should be a pretty winning prospect, right? As you can see, there are many value investors who have done extremely well, and this should give you some idea on how powerful value investing can be if done correctly. Under this idea, nothing is speculative, rather done with a lot of deliberation.
So as a value investor it's not a full time job, just a waiting? And if it gets overvalued do you sell? I mean, can you be a successful value investor and spend months not even spending more than five minutes checking up?
Say you are checking stocks on day and notice a great value that you previously did not...is it tough luck and you have no money to spend on it?
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