16 Proven Personality Traits of Successful Investors

The financial media is peppered with how much money this hedge fund manager makes and how expensive an art collection that professional investor owns is. While it’s interesting to follow the investor gossip, these public snapshots of generally private investment gurus are really useful for another reason: an up-close and personal window into the personality traits of successful investors.

Dissecting the psychological makeup of master investors isn’t just guesswork — there’s been a ton of research into what behaviours top investors use to make their money.

The Big Five Personality Traits of Successful Investors

In 1970, Lewis Goldberg set out to create a sort of encyclopedia of personality characteristics. Out of over 1000 traits, he was able to create 5 buckets of positive personality traits: emotional stability, extraversion, openness, agreeableness, and conscientiousness. It’s a good framework to use as we look at how these traits impact investing.

First, some quick definitions of these traits: 

Emotional Stability: Relaxed and calm
Extraversion: Social, feels comfortable in presence of others
Openness: Open to new ideas, perspectives
Agreeableness: Works well with others, values cooperation
Conscientiousness: Employs sell discipline, follows rules 

The Traits of Great Investors

In turn, these “Big 5” traits were recently studied by MarkeyPysch (a firm that studies this kind of stuff) and broken down to examine exactly which personality traits are shared by top investors.

In a paper published last year, the research firm ranked these five traits for how well they performed, the size of losses they caused, and how likely they are to cause investor misbehaviour.

Here’s a list of the top 16 traits of top investors: 

1. Open and agreeable to new ideas: Top investors are open to learning new things, objective in their analysis, and collaborate with their teams to find investment candidates. 

2. Go with the flow, carefully: Long term investors learn how to let their winners run and cut their mistakes quickly. Investors who are resistant to change typically report suffering larger losses. 

3. Not exactly thrill seeking, but not cowards either: Good investors aren’t gamblers at heart. They are brave face of uncertainty and plan a course of action. Top investors don’t shirk from decision-making. 

4. Resilient: Top investors embrace life. Their optimism makes them resilient investors — even in the face of setbacks. They roll with the punches, even when the rules of the investing game change in front of them. This lowers risk, too. 

5. Social individualists: Best performing investors are OK in social settings but they don’t necessarily seek out yes-men friends. They want to think objectively and go against the crowd.

6. Disciplined, but not to a fault: They follow a plan of action and stay consistent. But ultimately, they’re open to being convinced of a different plan of action, at any time. There’s no silliness or acting on a whim here. 

7. What pressure?: When money is on the line, people make bad decisions. Investors who perform well stay cool and calm under this stress. By not procrastinating or acting impulsively, good investors make decisions quickly and avoid bad losses.

8. Eyes on the exits: Investors should be confident of their ideas but best performers have contingency plans before they make their moves. If something doesn’t work, they exit quickly and move on.

9. Avoids crowds: Crowded trades are the ones you find pundits on TV yapping about. By the time, these talking heads learn of the trades, top investors are long gone. They avoid stocks that are everyone’s favourites. 

10. Doesn’t chase hot stocks: Good investors don’t typically chase after hot investment ideas — they’re patient and wait for stocks to come to them. Investors who like trend following or blindly subscribe to expert advice report larger losses when it all hits the fan.

11. Self-aware: Investing isn’t about ignoring your emotions. Interestingly, investors who aren’t aware of their own emotions are more susceptible to bigger losses. Good investors sense danger in their guts, process it, and make a decision with their brains. That feedback loop appears important for risk management.

12. Eats humble pie: Many investing legends are massively wealthy, yet they maintain a certain level of humility that’s essential to winning at the investing game. Overconfidence blinds good decision making, kills returns and makes us open to big losses.

13. Keeps fingers off the buying button: Market Pysch’s research shows that extraverts are more likely to buy stocks as they surge upwards as well as buy them on dips.

14. Stays out of the herd: Too many times we get sucked into doing what others are doing; Herding is a bad recipe for investing success. In an effort to blend in and keep social dissonance low, agreeable investors sometimes mistakenly buy high and sell low.

15. Keeps emotions in check: Emotional investors sell quickly when stocks go up. Locking in profits is never a bad thing but it appears to be the culprit for emotional investors’ lower overall performance.

16. Doesn’t seek to confirm, disproves instead: Confirmation bias — our human need to find evidence to support our own ideas — may be at work when emotional investors buy more stock when it drops. Buying more when a stock goes down (dollar cost averaging) lowers our entry point but it ignores why the stock dropped. Good investors re-examine constantly.

This type of study — examining the traits of top investors — is important because so many books and experts sell their “infallible investing systems” (buy this stock and you’ll profit 1000% in 3 days!). Of course, that’s hogwash — but, understanding the psychological makeup of profitable investors, we now have a blueprint of exactly who these investors are and how we can learn from them. That’s good — real good.

Source: http://library.wallstreetsurvivor.com/

The Best Investment Advice of All Time

The greatest investors follow a number of different systems, but their underlying principles tend to be similar and surprisingly simple. Here is what you can learn from their advice:

1. "Buy when there's blood in the streets." -- Baron Rothschild

Everyone thinks they know this one. Almost no one actually follows it. When your portfolio is leaking like the Titanic, why would you want to buy more? Wait a few months, and you'll usually be able to see why. Another good way to gauge the time to buy is that it feels terrible. When you feel good about a stock purchase, double check your numbers. It's easy to feel good when things are going up and up, but the long term results are likely to be disappointing.

2. "Buy a company any idiot could run, because sooner or later any idiot will be running it." -- Peter Lynch

Businesses with little competition and high profit margins can be run by almost anyone. Those with lots of competition and low margins require management genius. Stick with the simple business. Not only is it likely to do better, but you'll find it easier to decide when to sell. "Never invest in anything you can't illustrate with a crayon," Lynch said. It's still terrific advice.

3. "You won't improve results by pulling out the flowers and watering the weeds." -- Peter Lynch

People tend to think that what goes up must come down, and vice versa. While there is a tendency for stock prices to revert to the mean, a good business will continue to outperform a poor one. Selling your winners and keeping your losers is a bad plan.

4. "The best time to sell a stock is never."-- Warren Buffett

Does this mean you should really never sell a stock? No, but it means you should buy a business you'd be happy to hold for the foreseeable future. When things change for the worse you should sell, but trading in and out of the market frequently is usually a loser's game--especially for small investors.

5. "One way to end up with one million is to start with two million and use technical analysis."-- Ralph Seger

The average investor has the attention span of a two-year-old. He or she wants a way to make money now, and panics the minute a stock goes down. If someone offers complicated charts and formulas that promise quick profits, the ears perk up. The more complicated the method, the more appealing it is. Enter the voodoo practitioners, in the form of technical analysts. Of course technical analysis works some of the time. Everything works some of the time. But if you want a sure fire way to long term riches, look at the fundamentals and forget the fancy charts.

6. "The four most dangerous words in investing are 'This time it's different.'" -- John Templeton

The tech wreck is a recent example of this lesson, which investors never seem to learn. If you're being told that the market will perform in a way it never has in recorded history, be extremely skeptical. If someone starts talking about a "new paradigm," take your money and run for the hills.

7. "If the world's economists were laid end to end, they would all point in different directions." -- Arthur Motley

Calling economics a science is like calling an astrologer a life planner. Economists can't predict what will happen next month or next year with any degree of reliability. The best thing you can do is forget trying to predict the economy and invest for the long term. The ever-witty Peter Lynch put it another way: "If all the economists in the world were laid end to end, it wouldn't be a bad thing."

8. "An effective zero percent interest rate for hiding in a foxhole is prohibitive." -- Bill Gross

When people get scared, they flee to bank accounts and T-bills, even when the rates are laughable. But unless you take risks with some of your money, you effectively lose money all of the time, due to the eroding effects of inflation-which never seems to get as low as the interest rate on your bank account. Only in a time of rapid deflation would you want to keep most of your money in cash.

9. "The person that turns over the most rocks wins the game."-- Peter Lynch

Look at two stocks, and you'll probably find two so-so buys. Look at twenty or thirty, and you're likely to find a couple that look extraordinarily good. Looking at lots of options is the secret of finding winners.

10. "In this business, if you're good you're going to be right six times out of ten." You're never going to be right nine times out of ten."-- Peter Lynch

Of course by "good" Lynch might have meant himself. You'd better make that four out of ten if you're not Peter Lynch. It doesn't matter. If you make four great picks, you'll still do just fine.

11. "A lot of great fortunes in the world have been made by owning a single wonderful business." -- Warren Buffet

When you know you have a great idea, place a sizeable bet and have some patience. Look at the twenty-year returns of some of the world's greatest businesses and you'll be astonished. Remember, though, that those companies are unlikely to repeat that performance because they've gotten too large to grow quickly. The key to finding big winners is to find little companies with big prospects.

You may have heard these before but, this time, take them to heart. Use these rules to invest until it becomes second nature. Hang in there, even if things don't go your way at first. In the short term, you may think you're crazy to follow some of this advice. But look at your returns in five years or ten, and you'll begin to understand how the rich get richer.


By Anthony Bae
Article Source: http://EzineArticles.com/6550005

40 Gems for Traders and Investors

01. There are only three kinds of investors – those who think they are geniuses, those who think they are idiots, and those who aren't sure.

02. One of the clearest signals that you are wrong about an investment is having the hunch that you are right about it.

03. Investors who focus on price levels earn between five and ten times higher profits than those who pay attention to price changes.

04. The only way to be more certain it’s true is to search harder for proof that it is false.

05. Business value changes over time, not all the time. Stocks are like weather, altering almost continually and without warning; businesses are like the climate, changing much more gradually and predictably.

06. When rewards are near, the brain hates to wait.

07. The market isn't always right, but it’s right more often than it is wrong.

08. Often, when we are asked to judge how likely things are, we instead judge how alike they are.

09. Most of what seem to be patterns in stock prices are just random variations.

10. In a rising market, enough of your bad ideas will pay off so that you’ll never learn that you should have fewer ideas.

11. The more often people watch an investment heave up and down, the more likely they are to trade in and out over the short term – and the less likely they are to earn a high return over the long term.

12. Investing is not you versus “Them”. It’s you versus you.

13. The single greatest challenge you face as an investor is handling the truth about yourself.

14. Hindsight bias keeps you from feeling like an idiot as you look back – but it can make you act like an idiot as you look forward.

15. Ignorance of our own ignorance haunts our financial judgments.

16. Investing requires taking a stand on at least some of the uncertainties that the future holds. So your goal is to be as sure as possible that you don’t think you know more than you really do. How much you know is less important than how clearly you understand where the borders of your ignorance begin. It’s not even a problem to know next to nothing, as long as you know you know next to nothing.

17. Being part of the herd is fun while it lasts, but it’s seldom lucrative for very long, and it’s impossible to predict when the herd will change its “mind.” If you want to make more money than other people, you can't invest like other people.

18. Knowing, or even imagining, that someone else is relying on your advice can make you feel more accountable, forcing you to go beyond your gut feelings and fortify your opinions with factual evidence.

19. Find out who has a negative view and give this devil’s advocate a full hearing.

20. Whether you should take a risk depends not just on the probability that you are right but also on the consequences if you are wrong. You must always weigh how right you think you are against how sorry you will be if you turn out to be mistaken.

21. We are often most afraid of the least likely of dangers, and frequently not worried enough about the risks that have the greatest chances of coming home to roost.

22. When an intangible feeling of risk fills the air, you can catch other people’s emotions as easily as you can catch a cold.

23. Overreacting to raw feelings “blinking” in the face of risk is often one of the riskiest things an investor can do.

24. There’s safety in numbers only when there’s nothing to be afraid of.

25. Many of the world’s best investors have mastered the art of treating their own feelings as reverse indicators. Excitement becomes a cue that it’s time to consider selling, while fear tells them that it may be time to buy.

26. A mistake that stems from an action hurts worse than a mistake that results from inaction.

27. Once you have a handful of options, adding even more choices will lower you odds of making a good decision and increase your chances of regretting whatever decision you do make.

28. The harder the choice feels, the less people want to choose. Yet, the threat of having less choice almost always disturbs us.

29. The closer you come to hitting your target, the more regret you are apt to feel if you miss it.

30. The human brain is a brilliant machine for comparing the reality of what is against the imagination of what might have been.

31. There’s no end to the roads not taken.

32. Investors probably hurt themselves more by avoiding risks they imagine they might regret than by taking risks they really do end up regretting.

33. Instead of making judgments one at a time, you should follow policies and procedures that put your investing decisions on autopilot.

34. The more you can automate your investing, the easier it should be to control your emotions.

35. The pleasure you expect tends to be more intense than the pleasure you experience.

36. We often find out that what we thought we wanted before we got it is no longer what we really want once we have it.

37. There are two tragedies in life. One is to lose your heart’s desire. The other is to gain it.

38. Your memory of what was is shaped largely by what is.

39. If you focus too narrowly on the task at hand, you may never use your peripheral vision.

40. Chance favors the prepared mind.
Source:http://www.anirudhsethireport.com

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Investment Vs Speculation Vs Gambling

By Sunil Sahdev

Many people do not differentiate between the following terms when they invest their hard-earned money in different asset classes, particularly in stock market and often get confused between;

1. Saving

2. Investment

3. Speculations

4. Gambling


We often use the word savings and investment interchangeably, while both are different and both are necessary to secure our future. Saving is done for purchases and emergencies while investment is being done for creation of wealth. I have heard from most of the people that they are savings for their retired life, we need to understand that if we are saving for our retired life we need to invest that money to create wealth. We need to allocate the money wisely between saving and investment, it depends upon behavior of each individual and allocation can be made accordingly. In general, we shall allocate equivalent of three to six months expenses for savings and any excess over it should be allocated for investment.

There is a razor thin differentiation between investment and speculations, in reality it depends upon our own behavior as an investor to differentiate between investment and speculation. Investment and speculative deals are generally done for real assets.

Investment can be defined as “The employment of funds to acquire certain assets after due diligence for mid to long period of time, with the objective of wealth creation and additional income in future”.

Speculative investment can be defined as “The employment of funds to acquire assets for shorter duration of time to take advantage of fluctuations in prices of underlying assets”.

However, Gambling can be defined as “The employment of funds for entertainment/fun with the chances of return depends upon probability of certain situation or events”. For example, deploying funds on horse racing can be defined as gambling.

Key differential of investment vs speculation vs Gambling is:

1. Risk Analysis and Risk appetite: Investor will generally rely on the fundamental analysis of financials and other factors which can affect the price of the asset class and their decision to invest in particular asset is based upon certain fundamental values associated with the asset. Investors do have long term risk and return perspective. While speculators generally rely on the flow of the wind without analysing any fundamentals. Speculators do take higher risk for expects higher returns in short period. Gambler risk entire capital on bet and relay mainly on luck. They are the highest risk takers and ready to lose original investment also.

2. Price of the asset: Investor does not look at the price of the asset rather it looks at the asset itself to determine the decision to allocate some money now to get some money back later on. Investor does not get influenced by daily fluctuations of the asset price, because his/her allocation of money decision is based on the intrinsic value of the assets rather then price. Speculators look at the price of the asset to allocate the money and they do get influenced by the daily fluctuations of the price of the assets, aim of the speculator is to get some quick reward. Gambling is based upon odds and bets are placed only on assumptions.

3. Time Horizon: Investors allocate money for a particular asset for longer period while speculators allocate money for shorter period, on the other hand gambler place bet for immediate gain.

4. Leverages: An investor allocates money from its own resources for investment while and speculators may also rely on borrowed money to allocate. This is applicable mainly to assets belongs to equity market. Gambler generally allocate their own money and place bet for entertainment or fun.

An individual’s approach towards investment identifies the individual either investor or speculators. If an individual is investing without fundamental analysis, only on the basis of market sentiments and certain news, for a shorter duration can be defined as speculative investor. An Individual who invests with proper fundamental analysis for longer period of duration can be defined as investor.

In conclusion, Investor will get stable return over a long run and I advise all my readers to invest wisely after proper analysis of the company to secure their hard money for fairly good chances for creation of wealth. If you are a speculator, make sure your entry and exit to the market is at right time and always be ready to higher risk of loss of original investment in worst circumstances. Gambling should be avoided always and in most of the cases gambling is not legal also.
Source: via twitter

Things People Say During a Bull Market

Here are some things you've probably been hearing during the current bull market from a wide range of investors including some tongue-in-cheek translations about what they really mean.

On Fair Value:

Bears: We think the market’s fair value is much lower than current levels. (Translation: We have to say it’s way lower than the level where we called for a crash four years ago.)

Bulls: We think the market is fairly valued at current levels. (Translation: I have no idea what the fair value of the market is and neither does anyone else.)

Investment Strategists: If earnings grow at a consistent rate forever into the future and you slap a P/E ratio of 16x on the market we think stocks will rise 8-10% this year. (Translation: Stocks are up 3 out of every 4 years so if I keep predicting this I’m bound to be right eventually.)

Value Investors: The market is overvalued but our stocks are trading at a 30-40% discount to fair value.

Growth Investors: The monthly active user numbers are off the charts for this 3 person company that’s worth $50 billion.

On Market Gains:

Bears: It’s all artificial. (Translation: I didn’t participate.)

Bulls: We’re constructive from here and see a period of consolidation. (Translation: Please don’t fall, we’re all in).

On Sentiment:

Bears: Everyone is all in on the market. These people are delusional. No one sees the risks building up under the surface.

Bulls: Everyone is still bearish. Stocks climb the wall of worry.

On Interest Rates:

Everyone: Rates are going higher.

On Reading Material:

Bears: Did you read Hussman’s latest piece?

Bulls: Did you see what Siegel wrote today?

How it All Ends:

Bears: This will end badly (Translation: I will be gloating during the next bear market but will be too scared to buy).

Bulls: We predict a soft landing with a healthy correction that will make for a nice buying opportunity. (Translation: I will be too scared to buy during the next bear market.)

Private Equity: We have plenty of dry powder for the distressed opportunities that will arise from the next crisis. (Translation: All of that money will be used to shore up current investments that run into trouble.)

On Corrections:

Bulls: A 3% loss is the new 10% correction.

On Bubbles:

Bears: Biotech? Bubble. U.S. stocks? Bubble. Bonds? Bubble. Gold? Not a bubble. It’s going to $5,000 an ounce.

Bulls: This is not a bubble. The technology boom and bust of the 1990s, now that was a bubble.

Venture Capitalists: It’s a new era, not a bubble. We’re changing the world one app at a time.

On Strategies:

Index Investors: I’m a long-term investor through thick and thin (Translation: I become a long-term investor during bull markets.)

Active Investors: Yes, we’ve underperformed, but we will protect you during the next bear market (Translation: A few of us will and we really hope it’s us.)

Source:http://awealthofcommonsense.com/

Zen and the Art of Share Market Investing

By Wade Adams

It is all too easy to get caught up in the daily movements of the share market. One day it is up, the next it is down and so too are your emotions – and as a share market investor your emotions can be your undoing. Unfortunately it may not just be your portfolio that suffers either, when share market investing if we don’t wisely manage how we invest we can loose everything – from our sleep at night to the shirt right off our back. After investing in and studying the markets for over 12 years or so now I am very comfortable with it. That doesn’t mean I know what is going on all the time or even half of the time, all it means is that I continue to invest and I don’t loose any sleep over it. Here’s how I manage my portfolio and my emotions.

Practice like a Monk

For the purposes of this article I use the term ‘Zen’ in it’s slang definition – ‘Feeling peaceful and relaxed.’

You may have seen similar footage to that below of Buddhist Monks creating ‘Sand Mandala’s. (It is actually Tibetian Buddhists that do this practice, not Zen Buddhists, but I like the example none the less.) Sand Mandalas are tedious and slow works of art to create, taking days or weeks to complete. Shortly after the Buddhist Monks complete the Mandala it is then destroyed in a ceremony. The whole idea is to put your heart and all of your focus into your work without holding on to the outcome. This is all to symbolize the Buddhist doctrinal belief in the transitory nature of material life.

Do the work

What has Monks making Sand Mandalas got to do with investing? Almost everything if you are a value investor. Many investors both new and ‘experienced’ just can’t help themselves but get caught up in the daily action of the markets. I love this kind of enthusiasm, but I also believe chasing numbers on a board or lines on a chart can be a very distractive and hazardous habit. Instead be like the Monks – focus on the work (research), commit to your work (invest) and then… let it go. Getting all worked up everyday over the latest share price direction or ‘charting trend’ isn’t going to changing anything accept your quality of sleep. This is the trick – focus more on the work and less on what happens day to day once you make an investment.

Focus

Your focus is one of the hardest things in the world to manage. One minute you are hard at work and the next, ‘Oh, look it’s a squirrel.’ Focus is a human trait that we still don’t fully understand and it is ridiculously powerful – both meditation and hypnotism are forms of deep focus.

As an investor there are two focus points that I believe make all the difference to your portfolio. We’ve already discussed the first one, focusing on doing the work. The second one is focusing on what you understand.

Focusing on what you understand is a practice in working your strengths and avoiding your weaknesses. There are over 45,000 listed companies on stock exchanges all around the world, that is an overwhelming number of companies to try and understand. If you believe you can understand them all, power to you – but personally, I’m going to keep on keeping it simple.I stick to researching products and service that I can understand, made by companies that I can understand, in industries that I can understand, in markets that I can understand. Don’t get me wrong, I’m always reading, studying and aiming to broaden my knowledge and understanding, but if I’m not comfortable with my current level of understanding – I simply don’t invest.

The Secret to a Deep Sleep – Buy Cheap

Value Investors call this ‘a margin of safety.’ When you break this down into dollar terms this essentially means buying a dollar for say 70 or even 50 cents. You see, I believe that what a company is trading for on a stock market at any given time doesn’t necessarily mean that is what the underlying company is actually worth. Here’s an example:Quite a few years ago now I found a listed Gold Miner trading at slightly less than it had in cash in the bank. In other words, (if it worked this way) you could have bought your shares, walk into the company and said ‘I want out,’ grabbed your share of cash out of the vault and have made an instant profit. Now this discount to cash in the bank in itself isn’t enough to get me interested to invest, as companies have an uncanny knack to chew through cash, but it did get me looking further. Long story short, the miner not only had a big wad of cash in the bank and no debt, it also had a lease on a proven ore deposit and had nearly finished construction on their mine and processing plant. But because gold was tanking at the time the market wasn’t interested in a non-productive gold mine – even though in 6 months it would be productive. So, I ran the numbers, took off a discount to allow for any errors and assumptions in my research bought in and continued to sleep really well (as I knew I’d bought a solid asset at a large discount). Then I just waited for the market to catch on to this discrepancy – 10 months later the investment had more than doubled.

Patience

Patience is a hard virtue to get on top of. Personally, in many facets of my life this one has brought me unstuck and taught me a lesson more than once. If you want a solid incentive to help you practice patience, investing is a good one.

Often during a bull market as a value investor you will be searching and searching for undervalued investments and to no avail. This is when your patience is really tested. It is hard to continually keep doing all the work without getting any of the action. But you have to hold tight and remind yourself to stick to your rules, be patient and know that it will all pay off when the market turns or you do find that one undervalued gem.
Discipline

One of my filters for proceeding with an investment is, ‘Do I believe it has the potential to double within 2-3 years?’ This doesn’t ever mean it necessarily will, but it does make me ensure I am buying an investment cheap enough to provide that kind of potential return.

Often I will be watching a company on my Watchlist or researching a new company and it will not quite be low enough to make my ‘buy-in price.’ This can be oh-so frustrating and a good test of will power and conviction to your rules. I have missed out on purchasing great investments in the past from this, but I have also found that once you start breaking or simply relaxing your rules this is when you start to slip-up.
Getting in over your head

Which brings me to debt. Debt can definitely help to increase and compound your returns (I will talk about my experiences with debt and how I continue to use debt in a future post), but it can also completely destroy your portfolio and possibly all of the rest of your savings. If you ever find yourself ‘in a rush to get rich’ and start gearing up your borrowings faster and faster, it is probably a good time to step back and check yourself – preferably before it is too late.

Conclusion

I believe that to be a decent share market investor 20% of it is research and 80% of it is building the psychological strength to stick to your research and valuation rules – it is a funny ol’ game. There are no short cuts. If you do try and take short cuts time will eventually catch you out and teach you the lessons you are trying to rush past – just like a good Zen Master. So I continue to try and learn from the patient and persistent monks, keep myself in check and stick to my rules with each and every investment.

Enjoy the ride!

www.sharedinvestor.co

20 Golden Rules of Investing to Live By

Author: Francesco Casarella

1. If it sounds too good to be true, it's definitely not true!

2. Anyone promising returns over 15% per year should be asked why they're not counted among the greatest investors like Warren Buffett, Peter Lynch, or Ray Dalio.

3. To gain more, you often have to risk more, but sometimes your risk tolerance is zero (and you might not realize it).

4. Only invest in what you can explain to a 5-year-old or even a German Shepherd. In investing, complex thinking isn't necessary.

5. Minimize costs – if you're overpaying, someone else is cashing in.

6. When everyone agrees, everyone's likely mistaken.

7. Investing is like snagging a pair of top-notch shoes – it's a real deal when they're on sale.

8. Those who can, do it – those who can't just talk.

9. A great book is worth more than an expensive course.

10. Doing the right thing might make you feel foolish at times, but it eventually pays off.

11. Time is on your side: Use it as much as you can.

12. You're not your neighbor or coworker; everyone charts their own path and outcomes.

13. Diversify – remember, you're not Warren Buffett!

14. All extremes tend to balance out in the end.

15. Invest because you comprehend the business, not because you like the name or have a connection.

16. Evaluate results across years, not days.

17. Every invested dollar should have a purpose; never invest without understanding why.

18. Develop a clear strategy before committing your money.

19. Compounding is a marvel, but you have to leverage it for it to matter.

20. Speculation isn't investing – it's the price paid by those who rush in without thinking.

Source: investing.com

Top 5 Mistakes Beginners In The Stock Market Make

 By Steve Burns

Navigating the vast landscape of the stock market can be both exhilarating and overwhelming, especially for those just starting their investment journey. Tales of overnight fortunes can be enticing, but they often overshadow the pitfalls that can trap the unprepared. Equipping yourself with knowledge is the first step towards avoiding these common traps. This article will shed light on five prevalent mistakes new investors often fall victim to and provide insights on how to avoid them. By understanding these errors and the principles behind sound investing, you’ll be better positioned to safeguard your investment capital and thrive in the dynamic world of stocks. Keep reading to fortify your foundation and become a more informed investor.

5 Common mistakes made by beginners while investing:

1. Lack of a defined investment strategy or plan.
2. Chasing small gains or getting into trends too late.
3. Letting your emotions drive investment decisions.
4. Failing to diversify.
5. Insufficient research or relying solely on tips and rumors.

1. Lack Of A Defined Investment Strategy Or Plan.

For many beginners, the stock market appears as a tempting opportunity to grow wealth quickly. New investors become enthralled by stories of overnight successes or individuals turning small investments into fortunes. Many dive in without a well-defined plan. However, successful investing is less about luck and more about strategy. Let’s explore why not having a clear investment plan can be a critical misstep:

1. Flying Blind: Without a strategy, you’re essentially gambling. While some bets might pay off, the odds are not in your favor over the long run. Investors with a plan have clear objectives and milestones, enabling them to measure their performance and adjust accordingly.

2. Reactivity Over Proactivity: Without a plan, you become vulnerable to market volatility. The ebbs and flows of the stock market can be unsettling. Without a strategy, an investor will likely react impulsively to short-term events, potentially selling low and buying high, which is the opposite of a profitable approach.

3. Lack of Clear Goals: A strategy clarifies financial goals. Are you investing for retirement, to buy a home, or for your child’s education? Each goal may require a different approach and timeline. Without defining these, it’s easy to lose sight of why you began investing in the first place.

4. Difficulty in Assessing Performance: How do you know if you’re on the right track without a plan? Regularly reviewing and comparing your portfolio’s performance against your objectives is essential. Without set benchmarks or goals, such evaluations become challenging. You can improve what you measure.

5. Increased Risk of Loss: A structured investment plan often considers risk tolerance and time horizon factors. Jumping into investments without assessing these factors can expose one to undue risk, potentially leading to significant losses.

Think of entering the stock market as setting out on a journey. Would you venture into unknown territory without a map, compass, or destination? Similarly, diving into the vast world of stocks without a strategy or plan is precarious. A well-defined investment plan not only offers direction but also provides a safety net against the inherent uncertainties of the market.

2. Chasing Small Gains Or Getting Into Trends Too Late

When you’re new to the stock market, the allure of quick profits can be hard to resist. However, this can often lead to a trap of chasing minuscule gains or jumping on the bandwagon of a trend when it’s already at its peak. Let’s delve into why these strategies can be detrimental to novice investors:

1. Short-term vs. Long-term Vision: The stock market is inherently volatile. Aiming for small gains might work in the short term, but it’s not sustainable. Constantly trying to time the market for minor profits can lead to frequent trading, higher transaction costs, and added stress. A longer-term vision with a focus on value can provide more stable returns.
2. Risk of Late Entries: Hearing stories of stocks that have skyrocketed can be tempting. But when a trend becomes mainstream news, it might have already peaked. Buying into stock at its all-time high is risky, as there’s often limited room for growth and a higher potential for decline.
3. Emotional Trading: Reacting to market movements and media buzz can lead to emotional decisions rather than ones based on sound research. Emotions like FOMO (Fear of Missing Out) can push beginners to make hasty investments without proper analysis.
4. Lack of Diversification: When chasing after a specific trend or stock, beginners might neglect the fundamental principle of diversification. Investing all resources in one trend can expose one’s portfolio to unnecessary risks.
5. Ignoring Fundamentals: Trends come and go, but a company’s fundamentals – earnings, liabilities, and growth prospects – remain crucial. Instead of just following the crowd, it’s imperative to understand the company you’re investing in.

While wanting quick returns or being part of the latest stock market trend is natural, beginners should be cautious. Investing requires patience, research, and a well-thought-out strategy. Instead of chasing the wind, build a solid foundation for your investment journey.

3. Letting Your Emotions Drive Investment Decisions

The stock market is a complex interplay of numbers, trends, and predictions. But one factor that can unpredictably skew all three is emotion. For beginners especially, the emotional rollercoaster of investing can be overwhelming. Understanding why letting your feelings drive your investments can be problematic is essential. Here’s why:

1. Fear and Panic: The most immediate emotion new investors often grapple with is fear. The immediate reaction might be to sell everything, whether it’s a sudden market downturn or bad news regarding a particular stock. However, market volatility is natural, and panicking can lead to locking in losses unnecessarily.
2. Overconfidence: On the flip side of fear is overconfidence. A few initial successful trades can give beginners a sense of invulnerability, leading them to make reckless decisions or over-leverage their positions.
3. Attachment to Specific Stocks: Sometimes, beginners buy shares in a company they have a personal affinity for, whether a favorite tech brand or a local business. While loyalty is commendable, an emotional attachment can blind investors to red flags, preventing them from selling a consistently underperforming stock.
4. Chasing Past Performance: It’s easy to get emotionally tied to the success stories of yesteryear. Just because a stock performed well in the past doesn’t guarantee future success. Basing decisions on historical performance without considering the current context can be misleading.
5. Avoidance of Loss Acceptance: No one likes to admit they made a mistake. But in investing, refusing to accept and cut a loss can be detrimental. Holding onto a plummeting stock in the hopes it will bounce back, driven by pride or hope, can lead to even more significant losses.

The stock market isn’t a place for emotional decisions. It demands research, understanding, and a rational approach. Beginners should always take a step back, evaluate their motives, and ensure they make decisions based on data and strategy rather than feelings. Developing a habit of objective decision-making early on can set the stage for long-term investing success.

4. Failing To Diversify

“Diversification” is a term that seasoned investors swear by, but beginners often overlook its significance. Legendary investor Ray Dalio says it is the holy grail of investing. Diversification involves spreading your investments across various assets to reduce the risk of a poor-performing investment. However, beginners sometimes pour their resources into just one or two stocks, believing they’ve found the next “big thing.” Let’s delve into the dangers of this approach and the advantages of a diversified portfolio:

1. All Eggs in One Basket: Investing heavily in a single stock or sector is high-risk. If that particular stock or sector underperforms, it can substantially impact the entire investment. Diversification ensures that even if one asset underperforms, others can offset the losses.
2. Overexposure to Specific Risks: Different sectors have their own risks. By concentrating investments in one area, beginners expose themselves to the unique risks associated with that sector, whether they’re regulatory changes, technological shifts, or market demand dynamics.
3. Missing Out on Growth Opportunities: The stock market is vast, with numerous sectors showing growth potential. By not diversifying, beginners might miss out on opportunities in areas they haven’t explored or considered.
4. Increased Volatility: A non-diversified portfolio is often more volatile. This means its value can fluctuate dramatically over a short period, leading to potential panic and poor decision-making in response to these fluctuations.
5. Compromised Long-Term Returns: Historically, a well-diversified portfolio has been shown to offer more stable and consistent returns over the long term. By not diversifying, beginners might jeopardize their long-term investment goals and returns.

In investing, there’s no way to predict the future with absolute certainty. Diversification acts as a safety net, ensuring that the impact of unforeseen adverse events is minimized. As the adage goes, “Don’t put all your eggs in one basket.” By spreading investments across different assets and sectors, beginners can navigate the unpredictable waters of the stock market with a bit more stability and confidence.

5. Insufficient Research Or Relying Solely On Tips And Rumors

In an age where information is readily available, it’s surprisingly common for stock market beginners to take shortcuts in their research or, worse, base decisions on unsubstantiated tips and rumors. While acting on a “hot tip” might sound enticing, it’s a dangerous financial path that lacks the depth and understanding required for sustainable investing. Let’s explore the pitfalls of this approach:

1. The Danger of Herd Mentality: Acting on tips often means following the crowd. But who’s left to keep buying and driving prices higher if everyone has already bought in? When you act on a tip, the price may reflect the rumor, leaving limited potential for gains.
2. Unverified Information: Rumors are just that – unverified pieces of information. Basing investment decisions on unconfirmed news can lead to significant financial setbacks if the rumor is false. Also, even if the rumor is true, that is when the market sells off when it’s confirmed. The rumor was already priced in. 
3. Overlooking Fundamentals: Stock tips rarely comprehensively assess a company’s financial health. By neglecting proper research, beginners miss out on evaluating crucial factors like a company’s earnings, debt levels, growth prospects, and competitive positioning.
4. Susceptibility to Pump and Dump Schemes: Some unscrupulous traders spread positive rumors about a stock to inflate its price artificially (“pump”) and then sell off their shares for a profit (“dump”), leaving unsuspecting investors with losses.
5. Missed Learning Opportunities: Relying solely on tips denies beginners the opportunity to understand the market dynamics and hone their analytical skills. Over time, this lack of experience can hinder their ability to make informed decisions independently.

In investing, knowledge truly is power. While shortcuts might offer temporary gains, they’re no substitute for thorough research and a deeper understanding of market mechanisms. Beginners would remember there’s no substitute for hard work and due diligence. By cultivating a habit of comprehensive research and skepticism towards unverified information, new investors can pave the way for long-term success in the stock market.

Key Takeaways

• Short-term Temptations: Avoid the lure of quick, minor profits and late trend entries.
• The Power of Planning: Navigate the stock market confidently with a well-defined strategy.
• Emotional Detachment: Base decisions on data, not feelings, to prevent rash choices.
• Spread Your Assets: Protect your investments by diversifying across sectors and stocks.
• Validate Before Investing: Be skeptical of tips and prioritize in-depth research.

Conclusion

Venturing into the stock market without a roadmap is a recipe for pitfalls. By resisting immediate gratifications, crafting a well-structured investment blueprint, keeping emotions at bay, diversifying holdings, and prioritizing thorough due diligence over hearsay, beginners can position themselves for a successful and informed journey in the world of stocks. The market rewards patience, strategy, and knowledge; it’s essential to cultivate these traits for long-term success.

Source: www.newtraderu.com

Warren Buffett: On How To Pick Stocks And Invest Properly

By Steve Burns

In investing, few voices carry as much weight and wisdom as that of the Oracle of Omaha himself, Warren Buffett. With a storied career and unrivaled success in the fields of investing, business, and as a CEO, his insights form the bedrock of many investment strategies around the globe. Known for his profound understanding of business and the marketplace, his approach to stock selection and investment has consistently proven successful.

This blog post distills his thoughts and advice in his own words, presenting them in an accessible and practical way. Whether you’re a seasoned investor or just starting, these pearls of wisdom will guide you toward a more informed and strategic investment pathway.

Warren Buffett On The Stock Market

This transcript is from an interview Warren Buffett gave in 1985. 

“The first rule in investment is ‘don’t lose.’ And the second rule in investment is ‘don’t forget the first rule.’ And that’s all the rules there are. I mean, if you buy things for far below what they’re worth and you buy a group of them, you basically don’t lose money.” – Warren Buffett

The interviewer asked, “What do you consider the most important quality for an investment manager?”

Buffett replied, “It’s the temperamental quality, not an intellectual one. You don’t need tons of IQ in this business. I mean, you have to have enough IQ to get from here to downtown Omaha, but you do not have to be able to play three-dimensional chess or be in the top leagues in terms of bridge playing or something of the sort. You need a stable personality; you need a temperament that neither derives great pleasure from being with the crowd or against the crowd. Because this is not a business where you take polls, it’s a business where you think. And Ben Graham would say that you’re not right or wrong because a thousand people agree with you, and you’re not right or wrong because a thousand people disagree with you. You’re right because your facts and your reasoning are right.”

The interviewer’s next question was, “Warren, what do you do that’s different than 90% of the many managers who are in the market?”

Buffett went on to explain his stock investing strategy, “Certainly, most of the professional investors focus on what the stock is likely to do in the next year. They avail all kinds of arcane methods of approaching that, but they do not really think of themselves as owning a piece of a business. The real test of whether you’re investing from a value standpoint or not is whether you care whether the stock market is open tomorrow. If you’re making a good investment in a security, it shouldn’t bother you if they close down the stock market for five years.”

“All the ticker tells me is the price, and I can look at the price occasionally to see whether the price is outlandishly cheap or outlandishly high. But prices don’t tell me anything about a business. Business figures themselves tell me something about the business, but the price of the stock doesn’t tell me anything about a business. I would rather value a stock or a business first, and not even know the price so that I’m not influenced by the price in establishing my valuation, and then look at the price later to see whether it’s way out of line with what my value is.”

The narrator explains, “So, Buffett chose to stay in Omaha, Nebraska – this world where corn grows just minutes from downtown. Now, Omaha is a nice town, but nobody claims it’s a world financial center. Here, the only thundering heard is actually on four feet, off the beaten track.”

The interviewer continues with his next question, “Don’t you find Omaha a little bit off the beaten track for the investment world?”

Buffett explains his location doesn’t matter, “Well, believe it or not, we get mail here, and we get periodicals, and we get all the facts needed to make decisions. And unlike Wall Street, you’ll notice we don’t have 50 people coming up and whispering in our ears that we should be doing this or that this afternoon.”

“You appreciate the lack of stimulation here?” the interviewer asks. 

“I like the lack of stimulation; we get facts, not stimulation, here,” replies Buffett. 

“How can you stay away from Wall Street?” The interviewer questions. 

Buffett explains, “Well if I were in Wall Street, I’d probably be a lot poorer. You get overstimulated in Wall Street, and you hear lots of things, and you may shorten your focus. And a short focus is not conducive to long profits. And here I can just focus on what businesses are worth, and I don’t need to be in Washington to figure out what the Washington Post newspaper is worth, and I don’t need to be in New York to figure out what some other company is worth. It’s simply an intellectual process. The less static there is in that intellectual process, the better off you are.”

“What is the intellectual process?” the interviewer asked curiously. 

Buffett explains, “The intellectual process is defining your level, defining your area of competence, and valuing businesses. Then within that area of competence, find whatever sells at the cheapest price in relation to value. There are all kinds of things I’m not competent to value, but there are a few that I am competent to value.”

“Have you ever bought a technology company?” the interviewer asks. 

“No, I really haven’t,” Buffett assures. 

“In 30 years of investing, not one?” the interviewer asks again.

“I haven’t understood any of them,” Buffett answers. 

“So you haven’t ever owned, for example, IBM? We’ve never owned IBM.” The interviewer asks for a third time, puzzled. 

“It’s a sensational company, but I haven’t known IBM.” Buffett confirms. 

“And so, here is this technological revolution going on, and you’re not going to be a participant,” asks the interviewer. 

“Going right past me,” Buffett admits without caring. 

“Is that alright with you?” questions the interviewer. 

Buffett gives a detailed response, “It’s okay with me. I don’t have to make money in every game. I mean, I don’t know what cocoa beans are going to do. There are all kinds of things I don’t know about, and that may be too bad, but why should I know all about them? I haven’t worked that hard on them. In securities business, you literally, every day, you have thousands of the major American corporations offered to you at a price and a price that changes daily. You don’t have to make any decisions; nothing is forced upon you. There are no called strikes in this business.”

“The pitcher just stands there and throws balls at you. If you’re playing real baseball, and it’s between the knees and the shoulders, you either swing or you get a strike called. If you get too many called on you, you’re out. In the securities business, you sit there, and they throw US Steel at 25, and they throw General Motors at 16. You don’t have to swing at any of them. They may be wonderful pitches to swing at, but if you don’t know enough, you don’t have to swing. You can sit there and watch thousands of pitches, and finally, get one right there where you want it, something that you understand. Then you swing.”

“So, you might not swing for six months,” asks the interviewer.

“I might not swing for two years,” Buffett explains.

“Isn’t that boring?” wonders the interviewer. 

Buffett explains, “It would bore most people. And certainly, boredom is a problem with most professional money managers. If they sit out an inning or two, not only do they get somewhat antsy, but their clients start yelling, ‘Swing, you bum!’ from the stands. And that’s very tough for people to do.”

“Warren your approach seems so simple. Why doesn’t everybody do it?” asks the interviewer.

Buffett explains his investing edge, “Well, I think partly because it is so simple. The academics, for example, focus on all kinds of variables. Because the data is there, they focus on whether if you buy stocks on Tuesday and sell them on Friday, you’re better off. Or if you buy them in election years and sell them in other years, you’re better off. Or if you buy small company stocks. All these variables because the data is there. They’ve learned how to manipulate data. As a friend of mine says, to a man with a hammer, everything looks like a nail. Once you have these skills, you’re just dying to utilize them in some way. But they aren’t important.”

“If I were being asked to participate in a business opportunity, would it make any difference to me whether I bought it on a Tuesday or Saturday or in an election year? That’s not what a businessman thinks about when buying businesses. So, I why think about it when buying stocks because stocks are just pieces of a business,” Buffett concludes. 

Key Takeaways

• The two fundamental rules of investing, according to Buffett, are: to avoid loss and remember this rule always.
• Investing in success is not necessarily correlated with IQ; temperament plays a crucial role.
• Stock picking should be grounded in rationality and careful analysis, not influenced by market hype or noise.
• Buffett emphasizes the importance of investing within your “circle of competence,” understanding the business you’re investing in.
• It’s perfectly fine not to participate in every market trend or sector, especially if you don’t fully understand it.
• Patience is a virtue in investing; it’s not necessary to constantly swing at every investment opportunity.
• Investing isn’t about finding complex strategies or systems. The simplicity of the process can be its greatest strength.
• The value of a business and its stock are often disconnected; as an investor, focus on the business’s intrinsic value rather than its stock price.

Conclusion

Warren Buffett’s investing philosophy is simplicity, patience, and knowledge. It’s essential to understand that investing is not about reacting to every market trend or making constant transactions. Instead, it’s about knowing what you’re investing in, waiting patiently for the right opportunity, and focusing on preserving your capital. Remember that stocks represent partial ownership in a business; thus, understanding the business is vital to making informed investment decisions. Lastly, a calm and stable temperament is crucial for long-term investing success, emphasizing the significance of emotional intelligence in this sphere. You can approach investing more grounded, focused, and profitable through these principles.

Source:www.newtraderu.com