While it can be said that the stock market doesn’t have a single rule that doesn’t have an exception, the truth is that several basic principles cannot be easily disputed. These are general principles that have stood the test of time and are designed to help you become a successful investor.
They empower you with a better long-term view of the stocks market. When investing in a stock company, the points below are some of the fundamental investment principles you should know.
Outline Your Investment Goals
Experts and investors stress the importance of outlining what you wish to accomplish with your investments. It's comparable to planning a road map. Certainly, you wouldn't want to start driving across the country without first taking a look at Google Maps – planning.
Whether saving for a car, a house or college you need to set out your goals clearly. According to Ernie Cecilia of Bryn Mawr Trust , investing long-term is the same. Outlining your goals helps in determining the level of risk you will be willing to take with your money.
Focus On Individual Companies’ Performance
In the stocks market, you will come across lots of information which can be quite overwhelming as you screen potential investment channels. According to Warren Buffett don't worry too much whether the current market is cheap or expensive. He cautions that lots of people are likely to advise you that the stock market today is too expensive based on the fact that the US Dow Jones Industrial Average is now almost hitting 20,000.
Buffett, Chairman of Berkshire Hathaway, terms the above as nonsense because nobody really knows what direction the markets will take tomorrow. If for example, you want to invest in a company dealing with plane parts such as aero brakes, it’s good to recognize that their business prospects can climb even higher given the right economic environment or could plunge in 2017 in case events don't go well.
What should concern you more is how that particular company operates, its overall place in the industry, its long-term prospects, its competitors, and whether it will add anything new to the businesses portfolio you own already.
Reign in Your Emotions
Finance mogul Warren Buffet cautions that investment success doesn’t necessarily correlate with IQ. As an investor, what you need for long-term success is the right temperament. Buffett is talking about investors who let their emotions, not their guts, guide drive decisions, something likely to hurt your own portfolio returns.
Avoid Sweating the Small Stuff
As an investor looking into the long-term, you should not get into the panic mode whenever your investments display short-term movements: rather, look at the macro picture. Don’t get nervous about short-term market volatility which is inevitable. Long-term investor gains come from a market movement that is completely different - the one taking place over many years.
Diversify Your Investments
Experienced investors like Buffett and Andrew Carnegie shun stock diversification. This is because their extensive experience gives them confidence when it comes to identifying and quantifying their risk. Having noted that, don’t assume you are either Carnegie or Buffett – particularly when you are new to stocks investing.
The prudent way of managing risk is by diversifying your exposure. Visionary investors generally hold stocks from different companies in varied industries, and even in different countries. The wisdom here is that a single bad financial event is unlikely to affect all their holdings or at least it may affect them to varying degrees.
Investment gurus agree that perhaps the toughest part you are likely to face as a long-term investor is that you will be attempting to make pragmatic and informed financial decisions based on events that have not yet taken place. Bear in mind that while you can use previous data to predict, what matters most is what will happen in the future.
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