Investing Tips

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Category: Investments

Keeping it simple in investing is not stupid. Those who trade too often, focus on irrelevant data points, or try to predict the unpredictable are likely to encounter some unpleasant surprises when investing. By keeping it simple--focusing on companies with economic moats, requiring a margin of safety when buying, and investing with a long-term horizon--you can greatly enhance your odds of success.

Such returns generally cannot be achieved unless you take on a great deal of risk by, for instance, buying extensively on margin or taking a flier on a chancy security. At this point, you have crossed the line from investing into speculating. Though stocks have historically been the highest-return asset class, this still means returns in the 10%-12% range. These returns have also come with a great deal of volatility.  If you don't have the proper expectations for the returns and volatility you will experience when investing in stocks, irrational behavior--taking on exorbitant risk in get-rich-quick strategies, trading too much, swearing off stocks forever because of a short-term loss--may ensue.

But in the long run, the market is like a weighing machine--assessing the substance of a company. Yet all too many investors are still focused on the popularity contests that happen every day, and then grow frustrated as the stocks of their companies--which may have sound and growing businesses--do not move. Be patient, and keep your focus on a company's fundamental performance. In time, the market will recognize and properly value the cash flows that your businesses produce.

Likewise, just as you won't become a better baseball player by just staring at statistical sheets, your investing skills will not improve by only looking at stock prices or charts. Athletes improve by practicing and hitting the gym; investors improve by getting to know more about their companies and the world around them. We'll say it again--stocks are not merely things to be traded, they represent ownership interests in companies. If you are buying businesses, it makes sense to act like a business owner. This means reading and analyzing financial statements on a regular basis, weighing the competitive strengths of businesses, making predictions about future trends, as well as having conviction and not acting impulsively.