SmartCapitalist.com

Importance of Networking

Thursday, March 02, 2006
We all have heard about the importance of networking when applying for jobs, or moving up in a corporate environment. But would you consider networking to be important for investing? I consider it a crucial aspect for both real estate investing and securities.

When working in the stock market, it is important to develop a list of people who thoroughly understand the industry you are looking into. They will be able to help you discern whether a new product or news issue is going to have a material effect on the company, or whether it is a lot of hot air. The goal of this is to try to determine when the market is working irrationally. A lot of the time, a market will over correct, and under-value a good company. This will allow you to create a good entry point for a company that faces potential long-term growth but short-term problems.

Some good people to know are lawyers in the field, vendors, large customers, consultants, etc. Of course you need to be mindful of avoiding insider trading, as this could arise if you start talking to executives or going golfing with them shortly before you sell of some stock.

This network may not be possible for your situation and time constraints. Some guerilla techniques might come in handy though. One way to get some information without much time is to scour the web and find out what employees and customers are saying about the company. This should be possible on a short schedule, however it does not help you reduce risk as much since you probably will not be seeing the whole picture as clearly.

Remember, while you are creating a network of people who can help you learn about an industry and will keep you on top of key developments, you are not creating a network of people to give you hot stock tips. The concern of this network is to give you solid information about how companies work within a specific industry, and what is developing and legitimately commercially viable.