If you watch and invest in the market, you get to see so much — what works and what doesn't work, which qualities help you and which ones don't, and more. Which ten traits keep coming up as you watch great investors do their thing? Keep reading.
Successful investors do their homework (another cliché with endless truth to it). They look at the numbers of the company and keep asking, "Is this a good company?" They look at the sales and profits and ask, "Have they shown consistent growth?" They look at the company's balance sheet and ask, "Is the net worth (or net equity) growing?" — not simply growing quarter over quarter but year over year?
When an investor "measures twice," she sees many angles to the company and also sees and hears what others have to say. She weighs the pros and cons and then makes her decision.
Getting a second opinion
As a successful investor, you should have no issues reading or hearing from critics and others who question the securities that you're attached to. If you can't confidently state why you're in a particular investment, then a second opinion will help you be a better investor.
Then again, who says that you must sell because of what the financial talking heads and pundits are saying? If their analysis does bug you and you get concerned, then at least take a middle course. Instead of outright selling your stock, consider putting on a stop-loss order or trailing stop. If your stock continues to go up, then let them know! But if your stock plunges and you get out with your stop-loss order, no worries! You played it prudently, and your critics never have to know.
The bottom line is that you read the good, the bad, and the ugly so that you can make an informed decision.
"No guts, no glory" does apply here. Courage is an important trait for today's investor and especially for speculators. Achieving (or hoping to achieve) superior results requires that you do some things a little better than others.
In late 2008, lots of stocks were sharply down. Even good, solid, profitable stocks were down 40 to 50 percent. In March 2009, the Dow was down to the mid-6,500s (when it had typically been above 10,000). Many investors saw the great values to be had, but fear gripped the majority. Lots of experts were spooked, too.
Even though many companies had numbers that looked great and the company's fundamentals were outstanding and the stock was a "screaming buy" in typical markets, few investors took the plunge and bought.
Of course, in hindsight, many now say those were great buying opportunities and are kicking themselves. It does indeed take some fortitude to do the obvious, but it can be worth it. Those plucky few who bought in March 2009 were rewarded with staggering gains.
Avoiding greed is actually the mirror image of the preceding point on courage. This idea refers to when times are good — really, too good. When the market is ready to puncture the sky and seems to be heading for the moon, that's when you truly should be fearful. The market can be like a siren song: Those who can't resist the allure end up crashing on the craggy shores.
Always consider taking some gains (in other words, sell some stocks to realize gains). At the very least, put in some stop-loss orders or, even better, a trailing stop. You'll be glad you did.
Doing the opposite of what's expected
When everyone is buying X, should you do the same? Probably not. When the world is selling, you should consider buying. And of course, if the world is buying, then you should consider selling. This certainly sounds like the oldest advice on the planet, but there is something to it.
Successful investors don't need a crystal ball showing them what will have a profitable rise. Sometimes all they need to do is see — clearly — what is going on in front of them and discern what is wreckage and what is opportunity.
Specializing in a sector
If you're a high-octane investor or speculator, consider applying Pareto's 80/20 rule: Put 80 percent of your portfolio in that optimal diversification mode, and put 20 percent of your portfolio in stocks that you have a great degree of competence and mastery in.
It's not a bad idea to have an overexposure to a particular specialty in one part of your portfolio, as long you're diligent about the area.
Some of the best of the best (investors, that is) are information junkies. They don't just read press releases and financial reports from individual companies. They read the financial sites and keep abreast of the latest news and reports not only in the financial markets but across the political, economic, and social worlds.
If you're specializing in technology stocks, for example, you should be regularly reading about the latest events, trends, news, and so on affecting the world of technology stocks. Don't just look at how today's world is affecting your current holdings; look at what is going on today that will help you make sound choices about tomorrow's stock holdings.
Being informed means not being surprised — or rather, it means reading more than others so you'll be less surprised than everyone else will be.
If you watch ten different investors, you may see ten different opinions, ten different investment choices, and ten different styles or approaches. But watching each one tells you that discipline is part of whatever the investors are doing.
Discipline means that you stick to a plan that guides you in your choices both before and after the investment decision is made (that plan may be detailed, or perhaps it's just a few simple principles you abide by). Discipline means that you won't get distracted by whatever the world tosses your way.
Beginners need to have the discipline to stick (initially, anyway) to stocks of companies that
Are tied to human need
Have consistent sales and profits
Are in an industry that will be needed in the economy for the foreseeable future
Pay a regular dividend
Investors who have the discipline to stay within those basic parameters should do well over the long term.
Regularly monitoring your holdings
Regularly monitoring your investments is obviously a cardinal rule. No, you don't have to obsess, and you probably don't even have to watch the stock on a daily basis. But stock investing is typically not a set-it-and-forget-it pursuit.
Successful investors don't usually get surprised by what is going on with their stock holdings. To monitor your holdings, get on the email list for announcements from the company (or mutual fund itself), and consider getting alerts on company developments from third parties such as your broker or financial news websites.
Accepting mistakes early
Okay, this is where it gets nasty. No matter what you do, at some point you'll have an investment that just doesn't behave according to your expectations. Or, to put it bluntly, you'll have a real loser on your hands. You thought it was a great investment choice at the time. You even bought more when the stock price went down.
A poor investment is yet another lesson learned. Keeping winners and cutting loose the losers is part of every investor's considerations and always will be. Your long-term success won't be derailed because you chose a few losers; it will be derailed only if you keep them — or worse, keep accumulating them.