Investing in shares is simple, but far from easy. In this crazy market, these three tips should help steer you in the right direction.
Conceptually, most people intuitively understand investing -- you exchange your money today for a piece of a company that will hopefully earn you more money over the years to come. And thanks to brokers like The Motley Fool's Share Dealing Service, the execution is cheaper (flat £10 per trade) and easier than it's ever been.
But actually doing it "right" and being successful over the long term, well, that can be another story completely. Some people – and here at the Motley Fool we're fans of this strategy -- think that most investors are better off skipping individual shares altogether and opting for a low-costindex tracking fund.
Meanwhile, we get quips from Berkshire Hathaway's Warren Buffett like "be fearful when others are greedy and be greedy when others are fearful" and opposing thoughts like "the trend is your friend" from trader-types. Enter the head-scratching.
Having a solid grounding is always a must for anyone who wants to be a successful investor, but with today's crazy markets it's more important than ever. So whether you're a newbie to investing or a seasoned veteran, here are three tips to help you make sure you're investing Foolishly and not just foolishly.
1. Know Thyself, Fool!
There are few easier ways to land yourself in an investing pickle than to not have a good idea of where you stand when it comes to putting money into the market. This is particularly important because there isn't one right way to succeed -- Buffett, George Soros, and Anthony Bolton have all been tremendously successful, but each has had a very different approach.
How do you approach the market? Are you more of a speculator who's looking to capture the movements -- often short term -- of a company’s share price? Or are you more of an investor, looking at the nuts and bolts of the underlying business and hoping to profit from its prosperity?
Forget the connotations of the words "investor" and "speculator" for a moment and honestly figure out how you approach your share picks. Plonking down money for shares of PV Crystalox Solar (LSE: PVCS) because of you think the long term prospects for the solar industry make for a solid investment is fine, but you don't want to shoot yourself in the foot by looking at that investment with the eyes of a speculator and selling just because the stock price has moved against you.
2. If Everyone Else Jumped Off A Cliff ...
I think most of us are familiar with this fantastic bit of motherly logic. The idea is that just because everyone else is doing something that appears to be misguided, doesn't mean that we have to follow along. This is particularly true of investing where the focus on short-term results often causes investors to act like a herd of crazed lemmings.
One of the best examples of this that I can think of is the heat that Buffett and the UK's Tony Dye took back in the late '90s for not jumping on the tech bandwagon.
While most investors out there -- institutional and retail alike -- were raking in gains by betting on stocks like Autonomy (LSE: AU) and Arm Holdings (LSE: ARM), Buffett hung onto "boring" long-term holdings like Coca-Cola and listened to investing novices say that his style was a relic. At this point I think we all know how it worked out for the folks that went crazy over technology shares.
Keeping a sober, independent view when it comes to the stock market can be one of the hardest things to do, but it can often help you avoid the cliff that the rest of the lemmings are preparing to march off of.
3. Tips Are For Waiters
When I started writing for The Motley Fool, I figured I would forever be running into people who would want share tips from me. In fact, it's been quite the opposite -- most of the folks who want to talk shares have tips for me!
Of course it's after hearing many of these tips -- which often amount to something like "my uncle thinks Punch Taverns (LSE: PUB) is poised to break out!" -- that I realised tips are for waiters, not for the stock market.
When it comes to actually plonking down hard-earned money to buy shares, be sure to have your own thinking behind the purchase. A good way to do this is to write down the reasons for your investment. This doesn't have to be a doctoral dissertation, but it ensures that you're going on more than "Bob at the gym said it was a sure thing."
Putting it into practice
Every investment you make -- or decide not to make -- is more practice under your belt. Just like anything else, the more practice you get, the better you get -- provided, of course, that it'sgood practice.
Making sure that these three items are baked into your decision-making can help you get the most out of your investments and become a better investor. To recap, what we're looking for is:
- Know what kind of an investor you are and make sure your investments are consistent with that.
- Think independently and avoid becoming a market lemming.
- A share tip can sometimes point you in the right direction, but always make sure to do your own research and have a good reason for buying a share.
You can certainly take off now and put these ideas to work on your own, but sometimes bringing the right coach into the equation can help you progress even faster.
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