Investing Technique
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Investing Technique Summary
Many purchase equities based on the firm’s creation of a product that they like, perhaps a Ford stock because they’re a fan of their new Mustang, or Samsung equity because of their newly purchased touch pad. Others buy solely on the recommendation of others, whether they are qualified or not, and without knowing if the other person, a friend, a neighbor, has studied the investment. These approaches are all wrong.
You need to ensure the firm’s ability to produce long term profits. An investor should always be aware of the likeliness the firm will be able to generate above average (or better than competitor) profits into the long term future. The goal is to identify as many of the firms that are capable of profit as possible, and analysis is the tool through which that goal is reached. After successfully identifying the firms that are likely to outperform competitors, they use valuation to determine their approximate range of value, and purchase their equities after they have fallen within or below these prices. Investors should also attempt to determine the approximate return in relation to risk of the firm. By strategically approaching firm selection this way, they can identify both risk and probable return and contrast them between immediately comparable businesses. This allows for the reduction the loss and maximizes the chances of gain.
Investment strategy requires the realization of certain principles and the adoption of specific behaviors. Some of them may not make sense to you until after you have completely understood the overall strategy. You will begin to see why you should avoid deviating from them.
Focus on Percentage Returns
Focus on Percentage Returns
Investment returns and losses are based on percentages. Most people think this is obvious, but do not realize the relationship between percentages and the result on their money. Due to basic math, losses are far costlier than gains are beneficial. It is harder to replace lost capital than earn capital in percentage terms.
Study Investments
Study Investments
Very few individual investors actually study the investments that they purchase. This is their most frequent mistake. You should study, in depth, every investment you make. Since equity is little more than partial ownership of the business, the most important task is to comprehend the business itself. You should not buy without understanding the investment’s driving force. A basic idea such as “They’re producing a brand new line of smart phones, everyone buys smart phones, therefore I should invest,” is not enough.
Use Fundamental Screeners
Use Fundamental Screeners
You should start with a large number of potential investment firms. Narrow them down using a fundamental screener to a small number that have exceptional quality for your long or short trade. You can screen fundamentally using many websites on the internet.
Don’t Trust Media
Don’t Trust Media
The financial media is useful for many things but none of them are recommendations concerning a specific investment. This is due to two main factors: the amount of time information takes to move from point of origin to you and the short term focus of investment media. A potential lack of updates is an additional concern.
Investigate Price Movements
Investigate Price Movements
Many investors overreact to stock price movements on their own. You should avoid overreactions. The most important thing to realize about share movements is that they occur for a large number of reasons, many of which have no reflection on a firm’s ability to generate profits and earnings long term.
Buy Firms with Financial Statements
Buy Firms with Financial Statements
You should only purchase investments you can actually research and analyze. This eliminates investments that you either cannot analyze, or investments that have no publicly available financial history for research. In many cases this eliminates initial public offerings and private companies that cannot or will not provide you with financial statement information. The very obvious reason for avoiding closed history firms is that you simply don’t know what you are purchasing.
Quality Firms over Quantity of Firms
Quality Firms over Quantity of Firms
Trying to track a large amount of firms is difficult. The more firms that you have in a portfolio, the larger the amount of work you must do to track them. The chance increases that sub-par firms will be included in your portfolio.
Watch Value and Risk
Watch Value and Risk
Your investments are your most important purchases. Properly selected, investments deliver wealth as opposed to reducing it over time, raising your living standard and securing you against adverse events. You should acquire a good deal on investments, just like on merchandise and consumables. The only way to receive a good deal on investments is to buy investments that are likely to provide a return greater than their relative risk, at a price lower than their actual value. By buying investments when the market value is lower than the intrinsic value you reduce your chance of further loss. You also increase the chance that the market price of shares you are purchasing will rise in the future to match their intrinsic value.
Long Term Investing
Long Term Investing
Despite what many in the investment or investment media imply by their rapidly changing brokerage recommendation lists, long term investing is better than a short term focus. Any stocks purchased should be treated as a long term investment. The reason for this approach over trading is very simple: Trading costs versus Investment dividends and compounding interest gains. Short term trading runs up commissions and fees paid to Wall Street brokerages, which is the primary reason that recommendations change so often. Long Term Investing focuses on delivering returns for long periods of time from capital gains and dividends, while paying less money in commissions and fees.
Preserve Capital
Preserve Capital
You should always focus on capital preservation in situations where you are highly susceptible to capital loss. The focus of the strategy presented is entirely centered on seeking out situations that result in gains while focusing on capital preservation, or minimizing the chances loss will occur. By preserving capital, you limit your losses and allow your gains per trade to outweigh your losses per trade.
Trade Your Plan
Trade Your Plan
Investors often exit solid investments for the worst of reasons and keep horrible investments. It is important that you know why and when you should exit or stay within an investment. This is just as important as knowing when to purchase, since it helps you avoid losses and errors in advance. However, this requires an upkeep of knowledge on the financials of the firms you’ve invested in, which you should be doing anyway, as opposed to watching stock charts and graphs or moving on rumor. It also requires being aware of developments that could potentially ruin the fundamentals of the firm. The primary reasons you should sell a stock is if the company’s financial fundamentals are reversing.
Know What Mistakes to Avoid
Know What Mistakes to Avoid
Investors make two prominent mistakes in their investment strategy, both of which cost them money and time. The first stems from ignoring valuation and risk versus return. The second results from forgetting their sense of perspective in investing.
International Economic Analysis:
- Major Currency Economic Summaries
- Performance of Major Imports and Exports
- Mandates of Central Banks versus Expectations
- Performance Indexes of Major Economies
- Economically Correlated Currency Projections
- Large Funds Currency Sentiment Readings
- List of Technical Indicators to Look For
- Occasional: Foregin Exchange Technicals Markups
American Markets Analysis:
- Summaries of American Economic Structure
- Performance of Major
- Imports/Exports
- Federal Reserve Mandate versus Expectations
- Performance Indexes of U.S Economy
- Economically Correlated U.S Dollar Projections
- Large Trading Fund Index Sentiment Readings
- Market Wide Earnings Versus Valuations
- Fundamental Ranking of U.S Business Sectors
- Best and Worst Future Consensus Estimates
- Occasional: Firm Fundamental Strength Report
- List of Technicals to Look for While Trading
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