“Success in investing doesn’t correlate with I.Q. once you’re above the level of 25. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.”
* Warren Buffett
I have invested in stock markets since I was sixteen. Largely, I have been quite a successful investor, if you disregard the current slump in the financial markets. Over the years, primarily though my mistakes, I have learnt several invaluable lessons that have shaped my personal investing philosophy. Here is a summary.
- Do not invest money you cannot afford to lose. Know your limitations and own a mix of asset classes that are just right for you. Understand your ability to tolerate the hurts of losing money.
- Buying a stock is the easy part. Knowing when to sell, especially in the case of hot stocks, is challenging. Do ample research before buying stocks or mutual funds. Establish a few criteria for selling and have the discipline to sell when a stock meets your criteria.
- Invest; do not speculate. You cannot try to outsmart the market by trying to time the market or day trade. You cannot be right on every trade and every stock that you lay hands on—research has shown that even the best investors are right in about five of every eight stock purchases.
- Do not fret about missing an opportunity. Opportunities abound in every market—bull or bear, short-term or long-term.
- Do your own research. Stock research is indeed hard work, yet indispensable. Monitor stocks frequently. Pay attention to price-to-earning ratio (PE,) price-to-earning-to-growth ratio (PEG,) revenues and cash flow. Learn how to read company balance sheets and other financial statements.
- Follow each company’s fundamentals carefully. Consider vital changes to the company’s operations, competitive landscapes, and industry prospects. Pay attention to macro-economic factors that may influence the industry.
- Be skeptical of too much optimism and hype. Do not pursue past performance and buy a stock or mutual fund, possibly after a period of high returns. Watch out for stock analysts and investment advisors touting stocks after good news and playing down stocks that have already fallen. Understand that financial advisors may promote mutual funds that pay them high commissions and not necessarily get better returns for you.
- Never lose sleep over your investments. Never let your emotions guide your investments transactions. Money is, after all, not the most important thing in your life.