Don't Chase a Hot Tip Regardless of the source, never accept a stock tip as valid. Always do your own analysis on a company before investing your hard-earned money. Tips do sometimes pan out, depending upon the reliability of the source, but long-term success demands deep-dive research. Vacillating between different approaches effectively makes you a market timer , which is dangerous territory. Consider how noted investor Warren Buffett stuck to his value-oriented strategy and steered clear of the dotcom boom of the late '90s—consequently avoiding major losses when tech startups crashed.
Focus on the Future and Keep a Long-Term Perspective Investing requires making informed decisions based on things that have yet to happen. But I checked the fundamentals , realized that Subaru was still cheap, bought the stock, and made sevenfold after that. While large short-term profits can often entice market neophytes, long-term investing is essential to greater success.
And while active trading short-term trading can make money, this involves greater risk than buy-and-hold strategies. Be Open-Minded Many great companies are household names, but many good investments lack brand awareness. Furthermore, thousands of smaller companies have the potential to become the blue-chip names of tomorrow. In fact, small-cap stocks have historically shown greater returns than their large-cap counterparts.
From to , small-cap stocks in the U. This is not to suggest that you should devote your entire portfolio to small-cap stocks. In fact, penny stocks are likely riskier than higher-priced stocks, because they tend to be less regulated and often see much more volatility. Be Concerned About Taxes but Don't Worry Putting taxes above all else can cause investors to make misguided decisions. While tax implications are important, they are secondary to investing and securely growing your money.
Never compromise on business quality While saying "no" to complicated businesses and industries is fairly straightforward, identifying high quality businesses is more challenging. Berkshire was in the textile manufacturing industry, and Buffett was enticed to buy the business because the price looked cheap. He believed that if you bought a stock at a sufficiently low price, there will usually be some unexpected good news that gives you a chance to unload the position at a decent profit — even if the long-term performance of the business remains terrible.
He said that unless you are a liquidator, that kind of approach to buying businesses is foolish. The original "bargain" price probably won't turn out to be such a steal after all. In a difficult business, no sooner is one problem solved than another surfaces. Companies that earn high returns on the capital tied up in their business have the potential to compound their earnings faster than lower-returning businesses. As a result, the intrinsic value of these enterprises rises over time.
When you buy a stock, plan to hold it forever Once a high quality business has been purchased at a reasonable price, how long should it be held? He has held some of his positions for decades. Furthermore, quality businesses earn high returns and increase in value over time. Just like Warren Buffett said, time is the friend of the wonderful business. Finally, trading activity is the enemy of investment returns.
Frequently buying and selling stocks eats away at returns in the form of taxes and ill-timed decisions due to our behavioral biases. Instead, we are generally better off to "buy right and sit tight. Diversification can be dangerous In our view, individual investors gain most of the benefits of diversification when they own between 20 and 60 stocks across a number of different industries.
However, many mutual funds own hundreds or even thousands of stocks in a portfolio. Warren Buffett is the exact opposite. Simply put, Warren Buffett invests with conviction behind his best ideas and realizes that the market rarely offers up great companies at reasonable prices. It is difficult to find investments meeting such a test, and that is one reason for our concentration of holdings.
However, we feel quite comfortable concentrating our holdings in the much smaller number that we do identify as attractive. When it rains gold, put out the buck, not the thimble. Owning stocks makes it difficult for an investor to keep tabs on current events impacting their companies.
Excessive diversification also means that a portfolio is likely invested in a number of mediocre businesses, diluting the impact from its high quality stocks. If the answer is more than 60, you might consider slimming down your portfolio to focus on your highest quality holdings.
Most news is noise, not news There is no shortage of financial news hitting our inbox each day. While we read many headlines, we brush off almost all of the information pushed our way. Most of the news headlines and conversations on TV are there to generate buzz and trigger our emotions to do something, anything! Because there is so much chatter about markets, the economy, interest rates, price behavior of stocks, etc.
Many have been in business for more than years and faced almost every unexpected challenge imaginable. However, these businesses are still standing. With falling oil prices lowering Exxon Mobil's profits, should I sell my shares? The answer to these questions is almost always a resounding "no. Financial news outlets also need to blow up these issues to keep their audiences engaged.
If the answer is no, we should probably do the opposite of whatever the market is doing e. The stock market is an unpredictable, dynamic system. We need to be selective with the news we choose to consume, much less act on.
In our opinion, this is one of the most important pieces of investment advice. Yet, raw intelligence is one of the least predictive factors of investment success. Investing is not a game where the guy with the IQ beats the guy with the IQ. Constructed by a nerdy-sounding priesthood…these models tend to look impressive.
Too often, though, investors forget to examine the assumptions behind the models. Beware of geeks bearing formulas. Anyone who finds it easy is stupid.
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