The stock analysts at one of the best stock trading education academy provide 20 tips that they think will help you become a better investor.
- Keep It Simple
Simple investing is a smart investment. The seventeenth-century philosopher Blaise Pascal once said: “All the suffering of the people is the result of the fact that they cannot remain alone in their room.” This also applies, of course, to the investment process.
Investors, who act too often, rely on irrelevant data or try to predict the unpredictable, are often unpleasantly surprised. By keeping it simple – focus on companies with an economic competitive advantage, ensure a safety margin when you buy and invest with a long-term horizon – you can significantly increase your chances of success.
- Beware of Exaggerated Expectations
Are you going to invest in stocks to get rich quickly? We do not want to spoil the vote, but unless you are very lucky, do not double your money in the coming year with equity investments. This kind of returns is unachievable unless you take a lot of risks by, for example, investing in large amounts with borrowed money or betting on a risky share. At that time you do not invest anymore, but then you speculate.
Shares are historically the most profitable asset class, but this still means a bandwidth of 10-12 percent. And these returns are accompanied by a lot of volatility. If you do not invest in equities with the right expectations for return and volatility, irrational behaviour often follows: taking excessive risks in quick-rich strategies, over-trading and blacklisting forever because of a loss short-term.
- Be Prepared to Hold Positions for a Long Time
In the short term stock prices fluctuate and they go up and down like a yo-yo after every positive or negative news item. Predicting the short-term movements of the market is not only impossible but also makes you dizzy. Remember what Benjamin Graham said: “In the short term, the market is like a voting machine and one sees which companies are popular and which are not.” But in the long run, the market is like a scale and people are considering what a company is worth in essence.
Too many investors, however, still focus on the daily popularity poll and then become frustrated when the shares of their companies – which can be solid and growing companies – do not rise. Be patient and stay focused on the fundamental results of a company. Over time, the market will recognize the cash flows of your business and estimate it to the right value.
- Turn Off the Noise
Many media compete for the investor’s attention and most of them publish the daily price movements of the various markets and comment on it. This means a lot of price information – stock prices, oil prices, exchange rates, the prices of orange juice concentrate – and at the same time a lot of guesswork about why prices go up or down. Unfortunately, price changes rarely represent a real change in value. They simply reflect the market fluctuations inherent in a free market. When you disable this noise, you not only have more time left, you can also concentrate better on what is important for your investment success, ie the result of the companies in which you hold shares.
You will not be a better football player by studying match statistics and improving your investment skills by just looking at stock prices or graphs. Athletes get better through exercise and training; investors get better by learning more about their companies and the world around them.
- Behave Like an Owner
We have said it before: shares are not something that is traded. They represent an ownership interest in a company. If you buy a company, it is also worthwhile to act as the owner of that company. This means that you regularly read and analyze the financial reporting, weigh the competitive position of companies, make predictions about future trends, stick to your convictions and do not act impulsively.
- Buy Cheap, Sell Expensive
If you are guided by stock prices only in your buying and selling decisions, you will put the horse behind the car. It is frightening how many people buy shares because they have recently risen. And the same people will sell shares if they do badly for a while. Waking! If shares have fallen in price, it is generally a sign to buy! According to the same reasoning, when the prices have risen sharply, it is usually time to sell! Do not let your decision be determined by fear (when the prices fall) or by greed (when the prices rise).
- Pay Attention to Your Anchorage
Unfortunately, many investors take the price they paid for a share as an anchor or mental benchmark and they compare their own performance (and that of their companies) compared to this point.
But in the end, the estimated value of the companies’ future cash flows is the determining factor for the price and the valuation. You have to focus on this. If you focus on what you have paid for the share, focus on irrelevant data from the past. Be careful in selecting your anchors.
- Remember that Business Economic Factors are Usually More Important Than the Management Skills
You can be a great driver, but if your car has half less power than the rest of the field, you will not win anyway. Similarly, the best skipper in the world will have a hard time befalling the ocean if there is a hole in the hull of his ship and the rudder is broken.
Also remember that management can change quickly (both for better and for worse), while the economic factors of a company are usually much more static. If you have the choice between a profitable company with a great competitive advantage and a company with miserable returns, without safety margins but with brilliant managers, then choose the first.
- Beware of Snakes
Although the economic aspects of a company are essential, it is also important to manage the capital of the company. Even companies with a large competitive advantage can turn out to be a bad investment if a snake is in charge. If you find a company with management methods or reward practices that you have difficulty with, be alert.
When assessing management, the parable of the snake can help you. On a winter evening, a man found a snake in his path. The snake asked, “Would you please help me, sir? I’m cold and I’m hungry, and if I stay here I’ll definitely die.” The man replied: “But you are a snake and you probably bite me!” The snake replied, “I beg you sir, I am desperate, I promise I will not bite you.”
The man thought for a moment and decided to take the snake home. The man found a warm spot by the stove for the hose and gave him something to eat. After the meal, the snake bit the man suddenly. The man asked, “Why did you bit me now? I saved your life and took good care of you!” The snake simply replied: “You knew I was a snake when you picked me up.”
- Remember that Trends from the Past Often Persist
One of the most common warnings in the financial world is: “Past performance is no guarantee for the future.” Although this is absolutely correct, past results are still a good indicator of how people will perform in the future. This applies not only to asset managers but also to managers of companies. Good managers often find new business opportunities in unexpected places. If a company has a strong track record in discovering and profitably developing new activities, take this into account when valuing the company. Do not be afraid to stay loyal to successful managers.
- Prepare that the Developments Go Faster than You Think
Most companies are going down faster than you think. Beware of value pitfalls: companies that seem cheap but generate little or no economic value. Strong companies with solid competitive advantages will on the other hand often exceed your expectations. Take care of a large safety margin at a company. However, do not be afraid of a much smaller safety margin in a great company with a shareholder-friendly management team.
- Assume that Surprises Repeat Themselves
The first big positive surprise of a company is probably not the last. The same applies to the first big negative surprise. Think of the “cockroach theory”. The first cockroach you see is probably not the only one. There are dozens of cockroaches in the neighbourhood that you do not see.
- Do Not be Stubborn
David St. Hubbins put it very well in the film This is Spinal Tap: “There is little room between stupid and clever.” When investing, the boundary between patience and stubbornness is even more difficult to determine.
Patience stems from the focus on companies instead of stock prices and shows itself when you allocate your investments time. If a share that you recently bought at price has dropped, but nothing has changed within the company, your patience is likely to be rewarded. However, if you consistently talk bad news, or downplay the importance of poorer financial results, this is probably a matter of stubbornness. Stubbornness can cost a lot of money when you invest.
Always ask yourself: “What is this company worth? If I had no shares in it, would I buy it today?” If you answer these questions honestly and correctly, you are likely to be patient if this is necessary, but it also supports your sales decisions.
- Go to Your Intuition
The valuation model that you prepare for a company is highly dependent on the assumptions about the future that underlie it. If the result of a model does not cut wood, it is worth checking your prognoses and calculations. Use valuation models as a guideline and do not rely on oracles.
- Know your Friends and Your Enemies
What is going on around the shares you are interested in? Which investment funds have shares in the company and which service record do these fund managers have? Does management have any interests in the company due to the shares held by the managers? Do people buy or sell people who know the company well? These are all small but sometimes valuable pieces of information for your investment assessment of a company.
- Recognize When the Top is Reached
Whether it is tulip mania in the Netherlands in the 17th century, the American gold rush of 1849 or Internet shares in the 90s, if the masses unanimously believe that with a certain investment only profit and never loss can be made, then it is probably best that you avoid this investment. The tide will probably turn around quickly. Even if you notice that people invest in things that do not suit them (think of the elevator operator who gives tips on bonds, car mechanics who are busy in their workplace with day trade or successful doctors who quit their job to get rich in real estate), that a sign that you better get off.
- Search for Quality
If you focus on companies with major competitive advantages, you will find companies that are likely to make higher profits in five or ten years than they do now. You must ensure that your attention is focused on companies that increase the intrinsic value of their shares over time. With this, you have the luxury that you can have patience and keep the shares in your possession for a long time. Otherwise, you remain constantly anxious about what the stock market will do.
- Do Not Buy Anything If There is No Value to It
The difference between a great company and a great investment is the price you pay. There were many great companies for sale in 2000, but few of them were attractively priced. Finding good companies is only half of a good stock selection. It is just as important for your investment success to determine the right price you pay.
- Always Provide a Safety Margin
Unless you unravel the secret of travel in time, you will not escape the inherent unpredictability of the future. That is why it is so important to always include a safety margin with every share purchase you do – you will then be partially protected if your forecasts for the future do not come up exactly as expected.
As we have seen before, many successful investors attach great importance to a safety margin. That is no coincidence, a safety margin is just very important.
- Think Independently
Another common characteristic of famous investors is that they are prepared to swim against the current. It makes little sense to follow the advice of others and invest your money in the same investments as all other investors. It is worthwhile to act contrary to the crowd because the masses often end up wrong.
Also, remember that for successful investing in the right temperament is more important than an exceptional intelligence. If you can keep your head cool, you have an advantage over many others and you can buy at the low point and sell at the peak.