Strategies for successful investing
While investing can be a volatile world there are a number of proven steps you can take that will increase your odds of being successful. While nothing is guaranteed in the world of investing there are steps that can help you become more profitable with your investments.Here are some strategies for successful investing-
- Always leave a margin of safety-Most financial experts agree that building a margin of safety into your investments is the single most important thing you can do to protect your portfolio. This is done through selecting the right investments only after doing careful research. In addition it is crucial that you never invest money that you cannot afford to lose.Money to purchase a home, pay vital bills or fund an education are not dollars that should be invested.
- Try to be as conservative as possible in your valuation assumptions-Studies show that mostinvestors have a peculiar habit of extrapolating recent events into the future. In other words when times are good, they become overly optimistic about the prospects of their investments. The biggest risk is not overpaying for excellent businesses, but rather, paying too much for mediocre businesses during generally prosperous times. To avoid this situation, it is important that you err on the side of caution, especially in the area of estimating future growth rates when valuing a business to determine the potential return.
- You should only purchase assets trading at substantial discounts to your conservative estimate of intrinsic value-The bottom line is that once you have conservatively estimated the intrinsic value of a stock, you should insist upon an additional margin of safety. This will help you to insure your own money.
- You should only purchase businesses you understand (in other words recognize your own limitations)-While you do not have to everything about them you should be to understand how these businesses make their money and this way you are able to make reasonable assumptions about future performance. Far to many investors ignore this common sense and invest in companies that manufacture products outside of their knowledge base. Financial experts recommend that unless you truly understand the economics of an industry and are able to forecast where a business will be within five to ten years with reasonable certainty, do not purchase the stock. If you ignore this advice in most cases, your actions are driven by a fear of being left out of a "sure thing" or forgoing a huge fortune. Do not let your fear or your pride drive your investing choices.
- Have a rational attitude toward price-There is one rule of mathematics that every investor should know that is unavoidable: the higher a price you pay for an asset in relation to its earnings, the lower your return.In the hustle and bustle of investing many investors forget this basic premise and, sadly, pay for it with their wallets. Remember that just as you would not sell your house for a low ball offer there is no reason to panic and sell your proportional interest in the business simply because other people think it is worth less than you paid for it. If you have done your homework, provided an ample margin of safety, and are encouraged about the long-term economics of the business, you should view price declines as a wonderful opportunity that enables you to acquire more of a good thing. If those statements are not true, then you should not have purchased the stock in the first place. Instead, many investors tend to get excited about stocks that rapidly increase in price; which is a completely irrational position for those that were hoping to build a large position in the business.