Eight Ways to Become a Better Investor
Everyone would like to become a better investor. People get into a twist trying this method and that method only to abandon them for the next new thing. There’s an easier way, and it involves following a few simple suggestions…
1. Stop watching the market and start your watching stocks
Just because the market is frothy doesn’t mean your stock’s price is. Just because the market is sinking doesn’t mean your stock is now a bargain. Unless you look at your company and how it’s priced, you really can’t make an intelligent decision about whether to sell. Rising prices often cause investors to panic and sell everything, and falling prices may make them think that almost every investment is a sure thing. Both attitudes are equally unwise.
2. Spend less time reading and listening to information about your investments
It may sound counter-intuitive, but spending too much time attending to your investments can send your portfolio straight downhill. There are ‘experts’ everywhere and most of them sound very persuasive. They all claim to know what the market will do next week and whether your stock is headed up or down. If you listen to them you’ll be panicked into selling too soon or buying stocks you shouldn’t buy. If you must read about your stocks, read the company’s annual report and quarterly earnings reports and skip most of the opinions.
3. Get the buy right and don’t worry about the sell
Buy solid dividend-paying companies when they’re on sale and hold them until there is a major change in their story. In some cases, this may mean you can hold them for a lifetime. Don’t underestimate this method. Every time some pundit insists that buy-and-hold investing is dead, it proves itself all over again.
4. Ignore market noise
Every talking head can tell you why the market went up or down today. If the reasons sound flimsy, it’s because they often are. In the short term, the market makes very little sense and fluctuations can happen for a million silly reasons. In the longer term, good companies reward their shareholders and their prices reflect it.
5. Diversify intelligently
Buy stocks when they’re on sale and not just to diversify your portfolio. Don’t buy a housing stock when you know the housing market is declining, even if it would diversify your portfolio. As time goes on and you take advantage of the economic cycles, you’ll still end up with a diversified portfolio, but it will be composed of stocks you purchased at bargain prices.
6. Balance profits and losses.
Sooner or later, you’ll need to raise cash and will want to sell some stock. Be careful how you do it. Some investors only want to sell losers, while others can only stand to take profits. The former will have you selling stocks that are just about to turn around, while the latter will leave you with a stack of losers and a big capital gains bill. It’s almost always better to balance winners against losers, which minimises your tax exposure, cleans the junk out of your portfolio and allows you to take some profits.
7. Don’t confuse a great company with a great stock
Just because a company is making tons of money and has low debt and great management does not mean its stock is a good buy. Some great companies have share prices that have been bid up to unsustainable levels. If you like the company, wait for a temporary drop in the share price. Sooner or later, you’ll usually get one.
8. Take a beginning accounting class
It may be a little more work than the other suggestions but learning to understand a profit-loss statement and other fundamentals of business accounting will give you a huge advantage in understanding whether the company you’re buying is financially healthy.
By taking the time to understand how the markets work and how companies are valued, you can relax when everyone else is panicking and know that your long-term results will almost certainly beat any fixed-income investment you can find.