Successful investors do not happen overnight (even if a bull market makes everyone look like a genius!). What sets apart a successful investor is his perseverance, persistence and an often ignored aspect of behavior called TEMPERAMENT.
What you're doing when you invest is deferring consumption and investing money now to get more money back at a later time. So there are essentially two questions to be answered? How much are you going to get back? And when?
While no one likes to be wrong in their investment decisions, very often the quality of investment / business decisions geteroded by one's unwillingness to relinquish his/her ego. A high IQ may mean nothing in the stock market and at times, it may work against you if the intelligence is coupled with ego and overconfidence. For success in the field of investing, one needs to be let clarity and temperament guide decision making.
A beginner investor (and even many a seasoned investor) often finds it difficult to sift through the noise and chatter in the market (amplified by the media) to make a rational investment decision. For such an investor, it may do much good to reflect upon some of the most basic concepts on value investing followed by Warren Buffett, the most successful investors of all time.
INVESTING BASICS: 1 - SIMPLICITY OVER COMPLEXITY If you don't understand a business, DON'T INVEST IN IT.It cannot get any simpler than this. Yet, this is a rule that investors find hardest to follow!
INVESTING BASICS: 2 -MAINTAIN PROPER TEMPERAMENT An investor (as opposed to a speculator) should not be fixated on the daily price of a stock. If you are someone who is likely to come unglued when one of your holdings loses half its value overnight, you shouldn't be in the stock market in the first place. Above all, don't make an investment decision just because others tell you to. Having a sound temperament is essential for investing.
INVESTING BASICS: 3 - BE PATIENT Think 10 years rather than 10 minutes! If you are not prepared to hold a given stock for a decade, don't buy it in the first place. Also, don't simply dwell on the price of the stocks.Instead, study the underlying business, its earnings capacity, its future, and so on. Do not mistake activity for achievement. Time is the friend of the wonderful business.
INVESTING BASICS: 4 - YOU ARE BUYING A PART OF A BUSINESS Remember that a stock is a piece of a business. Evaluate the fundamentals of the business before you buy any stock. Do your homework! Don't think about 'stock in the short term'. Think about 'business in the long term'. Always remember that it takes decades for companies to become great.
INVESTING BASICS: 6 - PRACTICE INACTIVITY,NOT HYPERACTIVITY There are times when doing nothing is a sign of investing brilliance. No move is a good move is you already own the RIGHT stocks. Don't mistake activity for achievement and Beware of Hidden Costs!
INVESTING BASICS: 7-DON'T LOOK AT THE TICKER DAILY Instead, monitor the performance of the business. Tickers are all about prices. Investing is about Value.The stock price will eventually reflect the VALUE of the business.It is PERFORMANCE of the business that counts!
INVESTING BASICS: 8-VIEW MARKET DOWNTURNS AS BUYING OPPORTUNITIES Market downturns often drag down the prices of fundamentally sound stocks. Always search for VALUE. Price is what you pay, Value is what you get. VALUATION always matters. Learn how to value companies and be willing to act when a buying opportunity presents itself.
INVESTING BASICS: 9-TAKE A CLOSE LOOK AT MANAGEMENT Assess the management team before you invest.Look for shareholder friendly companies.Avoid investing in any company that has a record of financial or accounting shenanigans.
INVESTING BASICS: 10 -STAY WITHIN YOUR CIRCLE OF COMPETENCE Write down the industries and businesses with which you feel most comfortable and invest in them.Do not make exceptionsto your circle of competence rule.If you can rule out 90% of the businesses as outside your circle of competence, you're likely to do a far better job investing in the remaining 10%.
INVESTING BASICS: 11 - IGNORE STOCK MARKET FORECASTS Develop an investing strategy that does not depend on the overall movement of the market.Eliminate short term stock market forecasts from your investment decision making.
INVESTING BASICS: 12- MARGIN OF SAFETY, ALWAYS! Never count on making a good sale at a high price.Instead, purchase the stock at a lower attractive price so that even a mediocre sale gives good results.The entrance strategy is actually more important than the exit strategy.