Can you keep your personal feelings out of it? You should.
This article is the latest in a series that aims to help novice investors with the stock market. To enjoy past articles in the series, please visit our full archive.
From time to time in this series, I plan to offer a few tips that I think can help a beginner to refine their approach to investment.
Today's suggestion, which will probably sound counter-intuitive, is to steer clear of buying companies that you have a personal connection to -- your favourite fashion retailer, or whatever. But surely, you might ask, would you not know more about such companies and be able to understand them better as an investment prospect?
Unfortunately, the opposite is often the case, with people being worse at objectively assessing their own favourites -- it's always a bad referee to blame when your football team is denied a penalty, isn't it?
Your favourite shop?
In the years I've been investing, I've heard many people sing the praises of Marks & Spencer (LSE: MKS), telling me it's an obviously good investment because their clothes are always good quality, their food is great and so on. Well, it might be their favourite store, but it hasn't looked like a good investment to me at any time in the past decade, and certainly not if you bought at the peak in 2007.
I bought some shares in HMV (LSE: HMV) a little while ago, when I thought I saw a bargain. I liked HMV, shopped there regularly, and my local store was always busy. But my closeness as a customer stopped me seeing the bigger picture. Fortunately, when a report was released showing poor like-for-like sales and falling margins, I took the hint and cut my losses. But I still lost money, because I had not distanced myself unemotionally.
It can work the other way. Since the 1980s, I've been an avid user of Mac computers and have seriously disliked Windows. But because I've loved the products for so long, I've never felt I can judge Apple (NASDAQ: AAPL.US) shares objectively, and so I've missed out on what would have been a pretty good investment.
All the same to me
People even have their favourite supermarkets and won't shop in any others. Me? I'm happy to buy stuff from any of them. That means I was comfortable in my objectivity when I chose Tesco (LSE: TSCO) for our portfolio. Okay, I think you're likely to do reasonably well if you buy shares in any of the big supermarkets, but had I been, say, a loyal customer of one of the others, I might have seen last year's post-Christmas fall as proof that Tesco was losing it, and wouldn't have gone for what I think is a good long-term investment.
Looking at another in our portfolio, I'm a Vodafone (LSE: VOD) subscriber. What do I think of the service? It's fine, but indistinguishable from the others -- I stick with it because I got a cheap deal and I get cash every two years for renewing. That means I can be more objective about it, and when I assess those forecast 7% dividend yields, I know I'm not being swayed by customer loyalty.
Overall, although you can get some winners by going with your personal favourites, I reckon your portfolio will be a lot less risky if you can maintain that detachment and keep it unemotional.
There was a question in out last portfolio valuation -- what is the purpose of regular valuation updates? We're investing for the long term, and shouldn't be poring over valuations every day, right? Well, I don't know a single beginner who doesn't want to have a quick peek from time to time, and I would not try to discourage it. When you're starting out, it's fun, and you will surely want to see how things are going -- and as long as you're not tempted into short-term buying and selling, there's nothing wrong with that.
Also, this portfolio is educational, and regular updates provide a way of showing how various bits of news can affect share prices. It's a way of keeping a track of dividends as well, and seeing how they benefit a portfolio independently of share prices. So we'll keep our valuation updates, but they won't be too frequent.
Finally, a big part of the Beginner’s Portfolio is based on a strategy of buying strong dividend-paying shares, and Neil Woodford is an acknowledged expert on it. The free Motley Fool report "8 Shares Held By Britain's Super Investor" takes a look at some of his major holdings, and I strongly recommend learning from successful investors as part of the Beginners' process. Click here to get your free copy, while it’s still available.
The free report "10 Steps To Making A Million In The Market" is also one I'd urge beginners to have a read of, because it's inspirational and it really does make a convincing case for the great potential of long-term investing in quality companies.
> Alan does not own any shares mentioned in this article. The Motley Fool owns shares in Tesco and has recommended shares in Vodafone.