7 Habits Of Highly Effective Investors
Is the ability to rack up, say, a 15 percent return, year in and year out, a gift that some people have? Does the average investor need the services of some high-priced guru or a glitzy gimmick to survive in the market? The answer to both questions is no. Investing does not depend on alchemy. Effective investors are made, not born!
We've talked in the past about what it takes to make money in the markets, and we know that effective investors succeed using all sorts of different systems: Some are growth investors, while others emphasize income; some hold for the long term and measure their holding period in years, while others flip stocks in just a few days.
So what do they have in common? They approach investing as something that requires not only discipline and hard work, but also consistency. Whether highly efficient or almost irrationally idiosyncratic, their investing habits are as carefully orchestrated as are their portfolios. These investors have taken the time to learn what they need to know, and just as importantly, they have also learned what to ignore. But most of all, their investing styles grow out of their personalities and histories; they know their strengths and they also know how to compensate for their weaknesses. And best of all, just about anyone can become an effective investor!
Now let's examine these Seven Habits:
1. Enjoy The Process.
One of the keys to achieving success as an investor is to learn how to enjoy studying the stock market by finding ways to make it seem more like fun and not feel like work.
Although you may be living a very busy lifestyle, there are ways in which to weave the investing/learning process into the fabric of your busy days so as to make each step pleasureable, in and of itself. You need only to find those ways that best suit your particular set of circumstances.
2. Learn As You Earn.
Concentrate on one thing: your own growth as an investor. If you are just beginning the learning process, or if you have less than six figures of capital available for investing, then mutual funds are about the best place for you to be for the time being as you increase your own reservoir of knowledge.
Take the necessary time to improve your learning curve. Read and study books on investing, particularly those devoted to the areas of investing that interest you the most. And even more importantly, learn how to read and understand financial information such as that found in a company's 10-K report.
3. Leverage Your Knowledge.
Don't be like the large number of people who have potentially profitable information right under their very noses but don't take advantage of it.
Rather than blindly following the advice of those "experts" of dubious lineage - better known as analysts - instead, you should be actively investing in companies that you have studied and followed and understand - companies in which the upside potential should be mouthwatering, while the downside is limited to a point or two.
4. Narrow The Focus.
Nothing concentrates the mind like an investment that returns nearly 1,000 percent. And how do you find something like that? The message is very clear: Learn one industry, and learn everything about it. Ideally, you want to know as much as possible about an industry so you can filter out the BS!
When you concentrate on one area, you're not at the mercy of the market. If you really know the business and the company, you'll know when it's the market that's going crazy. A focused investor who knows the fundamental values of the companies in a sector should then be able to tell when that sector is becoming overvalued.
5. Wait For The Rewards.
Don't be afraid to make a long-term commitment to a stock that you have researched thoroughly and are convinced that it is a good buy. In essence, you should really approach every stock you buy with the intention of holding it forever.
Ideally, any prospective stock should be fast-growing, as well as a leader in its industry. It can't be trendy nor in a business that laymen can't understand. And if it passes these initial tests, then run a screen on the company's numbers. There are two important things to look for: Profits must have risen at least 15 percent annually for the past five years; and the last quarter's earnings must be higher than the preceeding quarter's.
Next, project the company's sales and earnings five years into the future, and look for the company to be growing significantly faster than the market average. Then calculate the company's average price-to-earnings ratio over the past five years, and consider the stock as a buy only if it is currently trading below that average.
Once you have done this analysis and made a purchase, you need not pay the company too much attention other than reviewing its price once a month. The goal here is to avoid falling into the trap of second-guessing that often undermines so many investors.
Genuine changes in a company's fundamentals - and not a transitory event like a price move - are the only events that should trigger a portfolio adjustment.
If one of the companies you are invested in should experience disappointing earnings, you should still hold on to it provided the explanation for that loss seems justifiable. And as you continue to monitor your portfolio periodically, the question you should always be asking yourself with respect to each investment is this: Knowing what I know, would I still buy this stock today?... If the answer is yes, then why worry?
6. Do Lots Of Homework.
If you have been investing for any length of time but are not having very good results, then a change in your habits is very much in order. And one of the best habits you can form is to devote a certain time every day toward reading books and periodicals devoted to investing. But books can only take you so far.
Also attending investment seminars (and I'm not referring to those "get rich quick" schemes you receive from some mailing list) or belonging to a support group such as A.A.I.I., are also very helpful. And one of the best "tips" I ever received is to never rely on a friend for investment advice, unless that friend knows more about investing than you do!
7. Get Paid To Wait.
One thing you learn after years of investing is that it doesn't pay to get excited. Calm, on the other hand, can be very lucrative, especially if you invest in a way that pays you in cash for staying calm. I'm speaking of course about dividends.
Whereas many investors seek out returns as high as 30 percent a year, to me, it just makes more sense to aim low. Be happy with 10 percent a year because more likely than not, your investment then will be in companies that are far more stable, and whose prospects for being able to continue paying out that nice dividend stream will also help to keep you from worrying. After all, peace of mind does have its price!
* * * * *
We've talked in the past about what it takes to make money in the markets, and we know that effective investors succeed using all sorts of different systems: Some are growth investors, while others emphasize income; some hold for the long term and measure their holding period in years, while others flip stocks in just a few days.
So what do they have in common? They approach investing as something that requires not only discipline and hard work, but also consistency. Whether highly efficient or almost irrationally idiosyncratic, their investing habits are as carefully orchestrated as are their portfolios. These investors have taken the time to learn what they need to know, and just as importantly, they have also learned what to ignore. But most of all, their investing styles grow out of their personalities and histories; they know their strengths and they also know how to compensate for their weaknesses. And best of all, just about anyone can become an effective investor!
Now let's examine these Seven Habits:
1. Enjoy The Process.
One of the keys to achieving success as an investor is to learn how to enjoy studying the stock market by finding ways to make it seem more like fun and not feel like work.
Although you may be living a very busy lifestyle, there are ways in which to weave the investing/learning process into the fabric of your busy days so as to make each step pleasureable, in and of itself. You need only to find those ways that best suit your particular set of circumstances.
2. Learn As You Earn.
Concentrate on one thing: your own growth as an investor. If you are just beginning the learning process, or if you have less than six figures of capital available for investing, then mutual funds are about the best place for you to be for the time being as you increase your own reservoir of knowledge.
Take the necessary time to improve your learning curve. Read and study books on investing, particularly those devoted to the areas of investing that interest you the most. And even more importantly, learn how to read and understand financial information such as that found in a company's 10-K report.
3. Leverage Your Knowledge.
Don't be like the large number of people who have potentially profitable information right under their very noses but don't take advantage of it.
Rather than blindly following the advice of those "experts" of dubious lineage - better known as analysts - instead, you should be actively investing in companies that you have studied and followed and understand - companies in which the upside potential should be mouthwatering, while the downside is limited to a point or two.
4. Narrow The Focus.
Nothing concentrates the mind like an investment that returns nearly 1,000 percent. And how do you find something like that? The message is very clear: Learn one industry, and learn everything about it. Ideally, you want to know as much as possible about an industry so you can filter out the BS!
When you concentrate on one area, you're not at the mercy of the market. If you really know the business and the company, you'll know when it's the market that's going crazy. A focused investor who knows the fundamental values of the companies in a sector should then be able to tell when that sector is becoming overvalued.
5. Wait For The Rewards.
Don't be afraid to make a long-term commitment to a stock that you have researched thoroughly and are convinced that it is a good buy. In essence, you should really approach every stock you buy with the intention of holding it forever.
Ideally, any prospective stock should be fast-growing, as well as a leader in its industry. It can't be trendy nor in a business that laymen can't understand. And if it passes these initial tests, then run a screen on the company's numbers. There are two important things to look for: Profits must have risen at least 15 percent annually for the past five years; and the last quarter's earnings must be higher than the preceeding quarter's.
Next, project the company's sales and earnings five years into the future, and look for the company to be growing significantly faster than the market average. Then calculate the company's average price-to-earnings ratio over the past five years, and consider the stock as a buy only if it is currently trading below that average.
Once you have done this analysis and made a purchase, you need not pay the company too much attention other than reviewing its price once a month. The goal here is to avoid falling into the trap of second-guessing that often undermines so many investors.
Genuine changes in a company's fundamentals - and not a transitory event like a price move - are the only events that should trigger a portfolio adjustment.
If one of the companies you are invested in should experience disappointing earnings, you should still hold on to it provided the explanation for that loss seems justifiable. And as you continue to monitor your portfolio periodically, the question you should always be asking yourself with respect to each investment is this: Knowing what I know, would I still buy this stock today?... If the answer is yes, then why worry?
6. Do Lots Of Homework.
If you have been investing for any length of time but are not having very good results, then a change in your habits is very much in order. And one of the best habits you can form is to devote a certain time every day toward reading books and periodicals devoted to investing. But books can only take you so far.
Also attending investment seminars (and I'm not referring to those "get rich quick" schemes you receive from some mailing list) or belonging to a support group such as A.A.I.I., are also very helpful. And one of the best "tips" I ever received is to never rely on a friend for investment advice, unless that friend knows more about investing than you do!
7. Get Paid To Wait.
One thing you learn after years of investing is that it doesn't pay to get excited. Calm, on the other hand, can be very lucrative, especially if you invest in a way that pays you in cash for staying calm. I'm speaking of course about dividends.
Whereas many investors seek out returns as high as 30 percent a year, to me, it just makes more sense to aim low. Be happy with 10 percent a year because more likely than not, your investment then will be in companies that are far more stable, and whose prospects for being able to continue paying out that nice dividend stream will also help to keep you from worrying. After all, peace of mind does have its price!
* * * * *
posted by Bob Moser at
12:47 PM
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