Nelson Smith isn't your typical financial blogger. A former potato chip salesman and current resident of South Korea, Nelson currently writes both for Motley Fool and on his blog, Financial Uproar.
He spoke with us about investing and thinking about money.
What are some common misconceptions about investing that you often see?
The biggest one I see is the notion that investing in smaller companies somehow is the riskiest thing imaginable. Penny stocks often get a bad rap (for obvious reasons), but there's a huge difference between investing in some penny stock without any profits and a small-cap company that's an actual business.
Besides, studies have shown that small-cap companies have actually outperformed their larger-cap brethren. It pays to invest in smaller companies.
How does an investment "make the cut" with you? What criteria do you look at before buying?
I'm a very odd investor. Essentially, I'm looking to buy depressed companies that most other investors have written off for dead. Often the stocks I look at are trading at 75-90% off their all-time highs, aren't profitable, and the market hates them.
Why would I invest in such crummy companies? Because I think that they'll be able to turn things around and regain at least some of their former glory. And when they do, returns can be spectacular.
When looking for a good turnaround story, I like companies with solid balance sheets that are generally debt free. I look for management to own a bunch of shares, since I like when their interests are the same as mine. I tend to gravitate to companies trading at a discount to book value (which is simply assets minus liabilities) as well. Basically, I'm trying to buy a dollar worth of assets for 60 or 70 cents. And when you do that, the companies you look at aren't very sexy.
What advice would you give to a new investor?
Unless you're really interested in the stock market, don't try to replicate what I do. It takes a lot of research, and you have to be a special kind of crazy to even be interested in stocks the rest of the investing world hates.
Instead, find a system that works for you. Some investors like receiving dividends, while others are all about growth stories. Find what motivates you, and then go for it.
But first, make sure you read. Educating yourself is very important. If you're not willing to spend the time reading annual reports, the world of buying individual stocks might not be the best choice. It's best to stick with ETFs or low-cost mutual funds if the topic of investing bores you.
What challenges might new investors not be expecting when they first dip their toes in?
For me, the psychological trauma of losing money was the most difficult part. It's hard to explain what that's like until you've actually experienced it.
Imagine doing hours of research on a particular stock. You're confident that it's going to rise, and you put a small part of your life savings into it.
And it goes down.
Suddenly, you begin to doubt everything. Do I even know how to invest? What if all my other investments are wrong, too? This doubt creeps into every facet of your investing psyche and can paralyze someone. It happened to me during 2009, when I should have been buying everything.
In addition to investing, you're always looking for deals. How do you find a good deal?
A few years ago, I implemented a small, but simple, rule whenever I buy something.
Google it first.
When I buy something online, I check all the usual options, but I also do a quick Google search for the product. Often, it'll be available at a website I never thought of, for a discount. I find this happens a lot with travel deals.
I also follow a few blogs and websites that consolidate a bunch of deals into an easily digestible amount of information. Find the best ones, and they can save you a few bucks. Of course, it's hard to resist the temptation of buying something just because it's a good deal, so be wary of that.
What trends in personal finance should we be keeping an eye on?
Finance bloggers never cease to amaze me with all the cool stuff they come up with. Stuff like travel hacking and credit card churning for rewards is something that's pretty interesting to me.
Consumers are continuing to become more informed. Crummy products just aren't going to make the cut anymore, even if they have a huge financial institution backing them. Also, having a non-biased person on their side to review these products is a huge deal for customers who aren't that financially savvy. Big financials would be very wise to get these influencers on their side. I don't think it's that difficult to come up with products that are both a fair deal for customers and can make the business money.
Besides that, it's obvious that buying online is going to further disrupt just about every retailer. Why pay full price at a regular store when you can use your smartphone and instantly buy it 20-30% cheaper?