The idea of putting money into the stock market for the first time can seem daunting at times. But every investment journey starts somewhere.
Knowing more about investing can hopefully help results. Here is a trio of hard-learned lessons my own experiences have taught me. They continue to influence my approach when looking for shares to buy.
1. Business is not investment
It is difficult to make a brilliant investment in a terrible business. But it is surprisingly easy to make a terrible investment in a brilliant business.
The reason for that is simple. Millions of investors across the globe are hunting for great businesses in which they can invest money. So when they find one, they may decide to put their money into it. Demand for the shares pushes up their price. That can mean they are expensive.
But even a successful company with growing profits can see its share price fall. If I had invested in Intuitive Surgical a year ago, for example, my investment would now be worth 11% less than I paid for it.
Yet the robotic surgery specialist has what I regard as a brilliant business. Its proprietary technology is in demand, selling peripherals offers high profit margins and product training helps make users loyal.
In its most recent annual reporting period, Intuitive grew sales 31% year on year and net income soared 61%. But trading on a price-to-earnings ratio of 69, the shares look too expensive for my tastes.
2. No company is infallible
Here are two questions. First, what is the best company on earth when it comes to future financial prospects? People may have different answers, but clearly there are some great companies out there even just among the ones I know about.
Now to the second question. Which of those companies is guaranteed to be here a century from now? Too hard? How about an alternative question then. Which of them is guaranteed to be here a decade from now?
The reality is, no matter how brilliant a company may be, its future can never be guaranteed. It may make mistakes, or could suffer from circumstances outside its control. From an investment perspective, that leads me to adopt the risk management of diversification.
Even if I think I have found my best investing idea ever, I only ever let one company make up a certain proportion of my share portfolio.
3. Knowledge is power
Investing in companies backed by little or no knowledge might sound like an odd thing to do. Yet that is a common mistake and certainly one I have made in the past.
When it comes to investment, knowing about a company and its industry matters because it helps me assess its prospects, then compare them to its valuation. Successful stock market investing is ultimately about buying shares for less than they are worth. So I need to be able to assess what a company is worth. I do that by sticking to what I know.
