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Tuesday, May 7, 2013

Essentials for successful investors



Being a successful investor requires skills similar to those of a successful chef. Every cookbook stresses the need to read the recipe before beginning, make sure you have all the ingredients and do not deviate from the recipe until you have practiced it several times. 
This wonderful advice, if adhered to in investing, will virtually guarantee an improvement to your investment return. You have to learn the strategies and secrets to investing, to invest smart. Investing can be fun and exciting. It could also be tremendously profitable. It involves skill and hard work. 
There are successful investors who have made millions investing and they have done so by looking beyond investing. Successful investing is about being successful in life and given below are some of the lessons that can be learnt from these successful investors.   

Be observant
Successful investors are not inherently superior people. They are simply savvy at observing life. They are very good at looking under rocks for opportunities, trends and cultural shifts that the rest of us don’t see. Or, where we just see a rock, successful investors see financial opportunity. 
These people look under more rocks than anyone else. And they know which ones of these rocks will unveil value that should make the stock rise. They always think of investing. When they listen to news or read the paper they think, “How will this event affect my investments?” 

Never think being a successful investor is just picking stocks 
Being a successful investor requires timing, proper asset allocation and patience.

Learn basic accounting
Much of stock analysis is based on what companies are worth. To know the worth, you need to be able to read the financial statements and then be able to interpret them. Free cash flows, return on equity, price to earning and sales ratios should be second nature to you. 
While you don’t need to take an accounting class (accounting courses often don’t teach how to evaluate a company), it is good to read a book on accounting that focuses on how to use accounting to evaluate a company. A book on finance for nonfinancial managers would be an excellent starting point.

Learn basic charting 
Charting will help you spot trends and time your purchases.

Find out where to get information
We live in an information age. Just about anything you need to know is readily available on the World Wide Web and at your local library. Not only you need to know where to get the information on the web or in your library, but you also need to become proficient at sorting out useful information from noise.


Have clear investment goals
What are you trying to accomplish? How long will this money be invested? What are the tax consequences? Never invest unless you have a plan, unless you know exactly what you are trying to accomplish. How much do you need to save? What return on investment do you need to meet your goal and time frame? 
 
Too many people invest aggressively in a way that could lose them money, even though their plan said they didn’t need huge returns. They jeopardize their whole plan if they lose money, whereas they would have been fine if they took the low-risk approach and stuck to the plan. 
 
Truly understand your risk tolerance 
You and I have lied to ourselves about this before. You say you can stand risk, but only if you make money, right? How will you feel if you invest Rs.100,000 and the day after you write your investment check, your account drops 30 percent to Rs.70,000? It happens fairly often. Are you really ready to weather such a market drop? Can you still follow your discipline? 
The bottom line is, never invest without knowing the risks versus rewards ratio. What are the chances of the investment going up and by how much? What are the chances of the investment going down and by how much? Embrace risk – without it, there is no profit.

Forget what the stock price was a year ago
Forget what you paid for the stock. You will learn that if you worry about buying a stock because it’s too high, or you don’t want to sell a stock because it’s either not up enough, too far up, or down, you focus on the wrong stuff. Evaluating a stock has no bearing on what it was worth a year ago, or what you paid for it.

Stick to your discipline and don’t become emotional
This is easy to write, harder to say and even tougher to do. However, maintaining a coolly disciplined, unemotional view of your investments will make you a better, richer investor. If you decide to be a value investor, stick with your value discipline through thick and thin. 
Understand, I do not recommend you choose only one discipline. Many investors use several disciplines. But what you should not do is, being frustrated with the one-month or one-year return on your value investments and then switch willy-nilly to momentum investments. Time rewards your tenacity and discipline. 
Don’t invest in fads. You’ll continually hear new theories. For example, buy the lowest priced S&P Sri Lanka 20 stocks with the highest dividends. If everyone begins to do this, the anomaly that might have existed is blown. Finally, don’t get emotional and don’t second guess yourself. The one time you second guess is the one time you’ll miss the ‘big one’.

Level with yourself
You aren’t going to pick every winning stock. You can be right and wrong because if you invest properly, you probably need to be right only 55 percent of the time. If you ask successful investors what percentage of stocks they actually lost money on, they would most probably say sometimes around 40 percent or more. 
Then how do they still maintain such an incredible track record? Their response would be- the stocks they lose on generally go down less than the gain on the stocks that go up. So, if you are beating yourself up, if you had one losing stock, you shouldn’t anymore.
You’ll never completely figure out the market. There is no single key to the market. It is ever changing and it is rarely logical. Have you ever seen a stock that just had the greatest news but went down? Why? You will be given hints but remember that no hard and fast rules exist. And never forget that every time you think you bought a winning stock, someone was willing to sell you that same stock.

Invest for long term
Attempting to guess short-term swings in individual stocks or the economy is a difficult, almost impossible task for even the best stock pickers or economists.

Remember, cash is king
Regardless of the market you’re in, cash is and always will be, king. Even if you’re earning only 4 percent or 5 percent, you need to always have some cash. Cash is necessary to buy more stocks, limit losses and be ready for a good deal. Never invest 100 percent in stocks. 

(Source: Secrets of the Investment All-Stars, Kenneth A. Stern)

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