We all like to think that we are good investors, but even the best investor in the world can improve on his or her success rate. All of us have our own strengths and weaknesses, so it is close to impossible to offer advice that can help everyone improve. There is also the fact that the amount of capital a person is working with will change how they approach the market. There is no one set of rules that will guarantee success, but there are ways to improve your investing strategy. Instead of trying to offer specific ideas on how to become a more successful investor, we are going to focus on a list that was created by the legendary investor John Templeton. Read the list, and see if you can spot areas of weakness in your own investing strategy.
Invest For Maximum Total Real Return
Many investors fail to recognize the impact that taxes and inflation have on their portfolio. We look at the 20% gain we made on our most recent trade, and forget to remember that we have to account for the taxes to be paid on that gain. Neglecting to account for taxes is a big mistake many investors make. Forgetting to take inflation into account is another mistake. While it is good to keep a percentage of your investments in fixed-income securities, putting too much emphasis on fixed income can hurt you in the long run. For example, if inflation is running at 4%, $100,000 today will be worth $68,000 in just ten years. That is a big drop. This means that you would need to earn more than 4% every year just to stay ahead of inflation.
Don’t Trade or Speculate… Invest
It is better to take a long-term approach to the market instead of constantly trying to get in and out of stocks for a quick buck. Investors that are constantly buying and selling stocks to make a few dollars are using the market like a casino instead of an investment vehicle. Long-term investors are patient and pay out less of their profits in commissions and capital gains taxes. Long-term investors also tend to be more informed about the stocks they hold since they pay attention to the news and the movements of the stocks there are holding over a much longer period.
Remain Flexible and Open Minded
Like everything in life, no type of investment is going to be right all the time. There are times when stocks are better than bonds, and other times when bonds and cash are better than stocks. A successful investor needs to understand the changes that happen in the market, and be able to adjust their strategies accordingly. This may seem to conflict with the rule of making long-term investments, but sticking with one strategy for too long can be just as dangerous as jumping from investment to investment. The important thing to understand is that no strategy is right for all conditions. Pay attention to the market, and be willing to change things up as needed.
Remember the Buy Low Rule
The old adage of “buy low and sell high,” seems simple enough, but it is amazing how often we trick ourselves out of following this rule. It is normal to want to buy stocks that are doing well, and sell stocks that are doing poorly, but if you always follow this strategy you will find yourself selling for a loss more often than not. Buying high is what we call “following the herd” and it happens far too often in the investment world. You have to be willing to buy stocks that are getting beaten up if you want to really make solid returns. That is not to say you should never buy strong stocks, but you have to be willing to go against the herd sometimes and pick up stocks that the rest of the market is selling. It is easy to wait until the market turns favorable, but by then the smart money has already made its move.
Look For Bargains among Quality Stocks
There are several ways to describe a quality stock. These include companies that are sales leaders in their industry, a strong management team, a well-capitalized company in a new market, or a company with strong brand recognition. These are just a few characteristics we can use to screen for quality investments. Developing a system to highlight quality stocks takes trial and error, but is something you need to start working on as soon as possible.
Buy Value, Not Market Trends
Another mistake a lot of investors make is seeing that a particular industry or sector is trending higher, and then buying as many companies inside that sector as possible. On the surface this seems to make sense, but it is important to remember that good stocks can make gains in bear markets and bad stocks can fall during bull markets. Focus on the investment, not on the market or overall economy.
Remember to Diversify in Both Stocks and Bonds
The best way to protect your hard-earned money is by spreading it out. No investment is ever 100% guaranteed to be successful, so a successful investor knows to never put all their eggs in one basket. Diversification is a key ingredient to a solid portfolio. Diversify across sectors, industries, and even countries. You cannot control the future, but by spreading out your money you can guard against any unforeseen problems that may arise with any particular investment.