Investing Tips for the New Investor – Part 2 of 4
Welcome back for part 2 of our 4-Part investing tips blog series. Hopefully you got a lot out of the 1st Part and have a little bit better idea about how you should go about getting started in the investment game. Part 2 will give you more of the same great advice, tips and information that you need in order to invest intelligently and build an excellent, diversified portfolio. So without further ado let’s get started. Enjoy.
- Anchors away? There is a concept in behavioral finance called ‘anchoring’ which refers to the practice of clinging to a specific reference point in your mind. This can be troublesome as there are many people that ‘anchor’ to the specific price that they paid for a specific stock and thereafter gauge that stock’s performance relative to this initial price. The reason that you should avoid this is simply that stocks, over the long run, will be valued based on the estimated future cash flow and value of the business that offered them. Focusing on this fact rather than the actual price that you paid for the stock will keep you from focusing on data that will eventually become irrelevant and could cause you to make errors in your investing strategy.
- Trust economics rather than management. What we are referring to here is simply that even the best managed business will sometimes fail and, conversely, a business that is managed poorly but still is wide-moat and a cash cow can sometimes perform incredibly well. Base your stock choices not on the management team but rather on the overall performance of the business and you will usually come out ahead.
- Take the high road. Many times you will be faced with a decision to purchase stocks from the company that engages in business or management practices that are not exactly what one would call ‘morally sound’. Our advice; skip these companies even if the returns might look favorable and find a business that treats people (and the planet) well. Even if you don’t make as much money you’ll still sleep better at night.
- Past trends can be an indicator of future results. No doubt you have heard it said a number of times, even if you’re just getting started in investing, that past performance is no guarantee of any future results. We agree with this statement to a point. Simply put, past performance shouldn’t be banked on like it was a certainty but it can be a really good indicator of how well a company will do in the future. Frankly, if you find a winning manager don’t be afraid to stick with them when they find new business opportunities as their strong record is a good indicator that they are future record will be strong also.
- Going south? It’s surprising how fast a business can deteriorate. Keep that in mind and be wary of companies that look like they have great stock prices but are generating little economic value. That being said, a strong business with solid competitive advantages can sometimes exceed what you expected. When you encounter a troubled business make sure to increase your margin of safety and when you find a business that has a shareholder friendly management team don’t be afraid to decrease that same margin.
- Surprises can be positive and negative. If you’re looking at a stock that has just had a huge surge you can bet that it will probably have more of those. On the other hand, a business that has just taken a big dive will probably continue to do so. Keep this in mind when you’re looking at any specific stock and purchase accordingly.
What did you think of Part 2? We hope that you are saying in your head “it was excellent” and that not only did you get a lot of great advice out of it but that you were looking forward to coming back for more. We’ll be back soon with Part 3 of course and more advice for the new-ish investor. We hope to see you then and, for now, take care.
Filed under: Investing
Like this post? Subscribe to my RSS feed and get loads more!