Half the battle in becoming a successful stock picker is to get into the correct frame of mind. While investment strategies may differ in the types of companies selected, the psychology surrounding any route to stock market success is broadly the same.
Here are some guidelines to bear in mind when investing. Not for nothing did legendary value investor Ben Graham say “The fault, dear investor, is not in our stars — and not in our stocks — but in ourselves…”
Nobody starts a flawless investment career from Day 1. Accept the fact that you’ll make plenty of mistakes early on. So be honest with yourself and learn from your experiences. Reviewing the “how and why” of disappointing investments is the best way of honing your stock picking prowess.
Did you really understand the company you were buying into? Did you think the company’s valuation looked expensive, but bought in anyway? Whatever you do, don’t blame the market makers, the media, economic news from Brazil or any other peripheral factors for your dreary portfolio. At the end of the day, the responsibility for your long-term investment success relies firmly with you. If you can’t be honest with youself about your poor share selection and remain in a state of denial, disaster awaits!
In other words, big bold bets are best. Common sense suggests that the more diversified your portfolio, the more likely it is to return a stock market average performance. And what’s the point of toiling away with an average performing portfolio when a no-effort index tracker can do the same job? To diverge away from the stock market means owning just a few carefully selected shares. If you never develop the courage to invest significant proportions of your portfolio in a handful of companies, the chances of any notable out-performance will remain slim.
Unless you’ve placed your investing faith in a mechanical strategy, or are comfortable remaining in cash for long periods of time, then sticking rigidly to several hard and fast investment criteria may become overly restrictive. What’s important when considering any prospective share purchase is whether the company meets your overall investing philosophy, rather than every individual sub-rule. More often than not, you’ll discover companies that are exceptional in one area but are not so great in another. Rather than dismiss the company out of hand, it could pay to be open-minded and weigh-up the pros and cons.
Although a little flexibility is sometimes required, being too adaptable could result in a lack of investment discipline. There are numerous distractions when investing. Market euphoria in sectors you’ve avoided, endless media ‘advice’ about unheard of stocks, or the often widely differing approaches of various high-profile investors can all lead you to question your own strategy. If you’re already following a sound investment process that you feel comfortable with, then suddenly being tempted into areas you know nothing about courts investment disaster. Go with what you know.
If you think about it, if the investing crowd was always right, then wouldn’t most people beat the market? Given that doesn’t happen, especially with actively managed funds, then perhaps ignoring what the crowd is doing is a better course of action.
But that’s not to say you should always go against the crowd. Instead, Ben Graham suggests a more self-centred approach:
“Have the courage of your knowledge and experience. If you have formed a conclusion from the facts and if you know your judgment is sound, act on it — even though others may hesitate or differ. You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.”
Don’t let success go to your head. Dramatic share price rises can lead to complacency and make you take your eye off the stock market ball. Unfortunately, plenty of investors develop the nasty habit of boasting of their gains instead of contemplating possible overvaluation concerns.
If you think that your gains are far too good to be true, they probably are…