I recently found the TV show “Shark Tank” browsing shows on Hulu and have already almost watched every episode.
The show is very entertaining, but I think there is also a valuable lesson for investors.
In case you have not seen the show, entrepreneurs pitch their ideas to a set of 5 “sharks”, trying to convince them to invest in their companies.
I enjoying putting myself in each person’s position; would I buy a stake in the business for that much? Would I sell my company for that much?
Here’s a clip for those not familiar with the show:
All too often I see new investors being taught to buy stocks based on how a stock’s chart looks, based on a 30 day moving average of the stocks price or any of the other technical indicators out there. (As opposed to a fundamental indicator, which is based on actual numbers from the business such as revenue, profit, margins etc)
Technical Analysis is a billion dollar business. “Teaching” investors (read: selling investors) how to make money buying and selling stocks frequently as prices reach certain ranges, averages or prices. Proponents for technical analysis buy based solely on the share price of a stock, not based on the fundamental business.
Look at how some of the largest brokers advertise to new investors:
Shown above is only a fraction of the technical indicators available to me on a currency (Forex) trading platform. Someone out there could probably tell me it is a screaming buy sign, another may say it is a sell sign…to me it looks like randomness and the perfect example of people trying to make investing more complicated than it needs to be.
Ideas preaching the value of indicators such as these shown above usually fall under the “Get rich quick” category. They may claim that you will be taught some secret, some special formula that tells you when to buy and sell and will instantly turn you into a millionaire.
Unfortunately, it just never seems to work out that easy.
I have never seen any of the “sharks” on Shark Tank calculate an Ichimoku (that’s really the name of one of the indicators above) or triangular moving average.
I have never heard Warren Buffett proclaim in Berkshire Hathaway’s annual reports the importance of a 65 day moving average of a company’s stock he is investing in.
Instead they want to know basic fundamental data about the business. Revenue, Profit Margins, Cash Flow, etc.
Remember by purchasing shares of a company’s stock you are literally becoming a partial owner of the company. Every time you are looking at a stock, pretend you are a “shark” and the CEO of the company is pitching the company to you.
Would you invest based on the fundamentals of the company? Is the product a good idea? Is it easy to copy? Do they do decent sales? Do they have good margins?
Take a lesson from the “Sharks”, Warren Buffett and other successful investors. The path to wealth does not lay in colorful lines on a chart, but instead on fundamental facts of business.