Maria Zdravkova - Equity Investing Like a Restaurant Order
Katie.Dix / 15 Jul 2020
E2W member and Alpha Challenger, Maria Zdravkova is a multi-asset portfolio management specialist with 8 years of experience. She has a Master in Advanced Finance. Maria is passionate about seeing women take control over their finances and especially participating in capital markets, that’s why she does workshops on Personal Finance topics for women.
Equity Investing Like a Restaurant Order
Have you ever been to a new restaurant, opened the menu and struggled to order because there were too many choices? This is the analogy I had in my mind when I read that 70% of British women decide to remain ‘uninvested’ and keep their savings in cash ISAs (which we all know currently pays close to nothing). The reason behind the decision was explained by too many investment options and not knowing where to start. Decision fatigue is a valid issue in many aspects of modern life. However, that shouldn’t stop you from investing simply because inflation is eating your savings every year you don’t.
Food ordering was my arch-nemesis the entire year through business school. My excitement for the next delicious lunch with my friends was completely buried under the anxiety of the upcoming meal ordering at a strange place. (To avoid sounding like a complete idiot, I should probably mention that most joints didn’t have English menu and my Spanish wasn’t great at the time). It came to the point where I’d often ask my classmates to choose for me and go on with whatever surprise dish I got. It worked out 90% of the time because food in Madrid is outstanding. Not a good strategy when your money is on the line though. So let’s look at the investment problem from the simpler perspective of a restaurant order and see if the same methodology can be applied to solve the puzzle of equity investing.
You are at that new fancy place and the menu is too extensive, what do you do? You can read the entire thing page by page and try to see what’s most appealing. There will be some natural elimination – in a large menu chances are that drinks and dishes you don’t know will get automatically ignored. Or at least they should. A new restaurant is not the best place to experiment. Eventually, after a lot of reading and wondering, you’ll see a familiar dish that you like, you’ll feel relieved and order. That’s quite similar to the top down investment analysis. It takes a bit too much effort and you might give up before you make that order.
Personally I would go a different way when confronted with a broad offering at a completely new eatery. I would ignore the majority of that menu, go for a dish that I know and love like pizza calzone. Once I’ve tried it, I’ll know if it’s good or bad and have an opinion about the restaurant. I will know whether I want to come back and if there’s a next visit, I may want to do a bit more reading around the menu and order something more adventurous. But only after I know that the food suits my taste.
The latter is known as the bottom up investment approach. Now let’s try to apply this one on the equity investment menu… uhhh I meant universe. Start with what you like – do you get a 5 GBP latte every morning on the way to work? If you do, chances are many others do as well. Who profits from that? All those large coffee shop chains are actually public. So while you’re using their product, you may actually want to consider profiting from their stock. There are countless possibilities - if you watch a lot of TV, look at streaming services. If ‘shopping is your cardio’, look at the clothing brands you buy. Maybe you really love your electric car, would you love its stock as well? The only reason companies are profitable is because consumers love and spend money on their products. It’s as simple as that. So where you’re spending, you might as well consider investing.
Don’t forget to listen to Warren Buffett and stick to investing in what you know and understand.
Makes sense? Happy first equity investment!
*Please note that this is not investment advice. All investments involve risk. You should do your own research before making any investment decision to ensure it is suitable for your individual circumstances.
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