Lots of people dream of investing in the stock market – but not all of them ever actually start buying shares.
Different investors get different results. For some people who end up not investing, the opportunity cost of the missed chance is enormous.
Here are three skills I think it can be helpful for an investor to have before they make their first move in the stock market.
Setting goals and devising a strategy
How good are you at knowing what you are trying to achieve, implementing a plan to try to achieve it, and modifying what you do along the way based on what happens?
Investing can involve a steep learning curve and, over time, most investors evolve their style.
But I think it still helps, from the day one starts buying shares, to have some sort of plan about how to invest and what success looks like.
Spotting undervalued opportunities
Ultimately, investing tends to boil down to a number of key elements and an important one is being able to buy something for less than it turns out to be worth.
Ideally, that would be much less than it turns out to be worth.
Simple though that may sound, it can be devilishly difficult in practice. Knowing what a company’s real value is today can already be hard enough – but successful investing also requires someone to assess what it might be worth in future.
Learning how to identify great opportunities that have been undervalued by the market is a skill — and potentially a very lucrative one.
Assessing risks as they really are, not as we’d like them to be
One thing that unites many experienced investors and those that start buying shares for the first time is an inability to weigh risks properly.
When we buy shares, naturally that is because we think we see an opportunity. That can lead the mind to underplay some of the risks involved.
Truly great investors take risks seriously. They do not start buying shares in a company or industry without having weighed such risks thoroughly.
Putting the pieces together
Having zoomed in on those three areas, let me illustrate their importance with an investment made a decade ago by billionaire Warren Buffett: the shares he bought in Apple (NASDAQ: AAPL).
Buffett’s investing strategy is clear: he aims to buy into great companies at an attractive price.
That involves diversifying, as you can have too much of a good thing. When Apple stock soared after his purchase, ultimately he reduced the stake his company owned as it was starting to dominate the portfolio.
Apple was an undervalued opportunity a decade ago because many investors focussed on a lack of product innovation rather than the huge ongoing cash flow potential of a lean product range and large installed base of loyal users.
There were risks, of course. Lower cost competition was a threat a decade ago. Technological advances that have brought down prices mean that is an even bigger risk now.
But Buffett reckoned the Apple stock price back then gave him a big enough margin of safety. His firm’s profits of tens of billions of pounds on the Apple stake have proven him right.
