This article offers
seven valuable insights into the psychology of investing, touching on everything from the dangers of information overload in an online world to the importance of understanding the risks that come with owning stocks.
To go the extra mile, here are seven more ideas to consider if you''re someone who takes investing seriously...
1. Investing Is a Choice You can "beat the market" (and most professional money managers as well) if you truly understand investing. What most people consider investing is really just speculating, and there''s a world of difference between the two.
If you buy stocks for "a quick pop," you''re not an investor; if your time frame is measured in months rather than decades, you''re not an investor. If you don''t know the underlying fundamentals of a company and its financials, you''re not an investor. This doesn''t mean you can''t make money -- it just means you''re playing the game, not the odds.
2. It''s a Market of Stocks, Not a Stock Market Everyone is focused on what the market is doing -- whether it''s the Dow Jones Average or the S&P 500 Index or the NASDAQ Composite. The underlying implication is that stocks march to the same drummer, rising and falling together.
Certainly, all stocks react to the same outside influences, such as economic growth, interest rates and exchange rates. But each stock reflects the valuation of an individual company, and each company has its own unique risks and opportunities.
Legendary investor Warren Buffett pays no attention to the level of the market in deciding which stocks to buy or sell -- and neither should you.
3. Know the Three Big Ifs - Stocks offer better potential returns than bonds or cash
if you buy them for the long term.
- Time can be your greatest ally
if the companies you own have predictable growth.
- Predictable long-term growth is rare but attainable
if your companies have sustainable competitive advantage.
4. Your Edge Great businesses have one thing in common: They each maintain an advantage over their competitors. This advantage is the source of their success; it is what separates great companies from the host of pretenders.
One type of competitive advantage is a
cost advantage -- namely, a company that operates more efficiently than its competitors. The other major category of competitive advantage is a
quality advantage. If a product is truly better, or even thought to be superior, consumers will pay more for it.
5. Cash Is King Once you''ve narrowed your list of possible purchases to those few with competitive advantage, give some thought to what their stocks are worth. For this, your focus should be on cash flow, not on reported earnings.
The earnings that a company reports each quarter are precise -- they''re just not terribly accurate. These earnings are determined by accounting rules, some of which don''t reflect reality and others of which get twisted to reflect a false reality.
6. Be Contrarian The goal is to find stocks that are out of favor. At any given time, stock prices are driven by fear and greed, and both emotions tend to the extreme. When people are most afraid the greatest opportunities make themselves available.
To help identify a potentially good investment, look up a stock quote at quicken.com, then click on "Analyst Ratings" in the left column to see how many Wall Street analysts are recommending that stock.
7. Have the Courage of Your Convictions For most people, this is easier said than done. But as a true investor, you have two advantages. First, by focusing on great companies, you can have confidence when the news is anything but reassuring. You can give these companies the benefit of the doubt.
Second, if you invest ar or every year (known as
dollar cost averaging), you will automatically be buying more shares when stock prices are low and fewer when prices are high.
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