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FOOL'S EYE VIEW
By
Carburton Street, London -- Every stock market pundit tries to distil the secret of stock market success to novice investors. "The trend is your friend", "Remember your margin of safety", "Always leave something for the next guy" and the rest. That's all well and good. But the key to stock market glory isn't contained in some hackneyed phrase. The real key to success is simply this: Experience. It takes a good few years, and a variety of stock market 'conditions', before you ever find out if you're a good investor. Until that day, there are plenty of novice mistakes to be made. Indeed, given the ever-changing nature of the corporate world, no investor should ever stop learning about the stock market. You see, history never repeats itself exactly. But spend enough years in the stock market, and common themes will re-emerge from time to time. Although the companies and industries may change, basic human nature does remain consistent. Greed and fear Take the dotcom bubble. Those who sat through Black Monday may have noticed some distinct similarities. Just before the Great Crash of 1987, there was high demand for new issues and penny share "shells". Ditto early 2000, with lastminute.com (LSE: LMC), Knutsford and so on. Experience of 1987's speculative froth in no-hope companies would have saved the unwary two years ago. Take the recent outbreak of war in Afghanistan as well. How many investors dumped stock in fright? Far too many, given the FTSE 100 touched a four-year low during September. In hindsight, it would have paid big time to have listened to experience. Indeed, in his book Common Stocks and Uncommon Profits, legendary US investor Philip Fisher even wrote a chapter entitled "Don't Be Afraid Of Buying On A War Scare". The experienced Peter Lynch, Ben Graham and Warren Buffett have all written similar advice. No set rules While spotting the follies of human nature may be relatively straightforward, identifying great individual investments certainly isn't. For starters, only through experience will you discover an investment strategy that suits you. Do you have the correct temperament for long-term buy and hold? Are you happy with your 'value' strategy? Is day trading really up your street? While many pundits say you should follow their particular strategy, at the end of the day, your stock market experiences -- good and bad -- will gradually dictate how you create your portfolio. And even when you're happy with a stock picking philosophy, you've still got to find suitable shares. Unfortunately, there's no concise formula to picking winning stocks. There are too many variables and possibilities involved to form any set-in-stone criteria. For instance, the resignation of the finance director, an aggressive expansion in the US, or poor trading at a rival firm may spell trouble for a particular company. Or it may not. Nobody knows for sure. Thus you have to make a judgement -- based on your stock market experience -- as to how that individual company, with its products, management and financial position, will fair. Indeed, even if trouble appears to be looming, the share price may have already factored it in. In such a situation, the company could prove to be a great investment if the gloom proves unfounded. Given the endless investment opportunities and possibile outcomes, intuition developed from past stock market experience becomes a vital part of an investor's toolkit. No short cuts Furthermore, experience will also tell you there are no short cuts to investment success. Over time, you will find that newsletter tipsters, Sunday broadsheet pundits and City analysts generally have no better crystal ball than you. In short, you have to do your own stock market research. You have to arrive at your own stock picking decisions independently of what others may say or do. And once you become reasonably confident when investigating shares, you'll find experience telling you to ignore stock market noise. Such things as money supply figures, non-farm payroll data, FTSE 100 index reshuffles, ex-dividend dates and your short-term portfolio performance have, in reality, little to do with finding winning shares. To summarise, plenty of experience won't necessarily make you a good investor. But if you are to become adept at stock picking, there's just no substitute to learning the hard way and building up your knowledge first hand. Indeed, you may find after a few years of stock picking, buying individual shares isn't for you. If that's the case, don't feel ashamed. In fact, it's far better to realise your shortcomings and get a tracker, rather than plod on and continually suffer at the hands of the stock market.