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New to investing? Three choices you need to make

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Getting started in investing can be daunting, but it doesn’t have to be. Investing isn’t a points-scoring game like football or tennis — instead we win by not making mistakes. Think about a commercial pilot — he or she doesn’t score extra points for arriving at the intended destination faster. Pilots are paid to go through their checklists, not make any mistakes, and deliver the passengers and crew inside the aircraft to the destination safely. 

There are plenty of mistakes that are made by investors when new to the game, however you will be able to minimise these if you understand the three choices below. 

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Be patient

The longer the better. Being patient has long been considered a big factor in success in investing, because as Benjamin Graham said — “in the short term the stock market is a voting machine, but in the long term it’s a weighting machine”. 

But thinking long term does not mean we can be hugely speculative. The majority of speculative shares are speculative for one reason: they do not make any money and may never do so. Being patient does not mean waiting forever for a loser to become a winner! It is worth having exposure to some speculative stocks, as the longer the time frame used, the longer we have to make it back. But we should not go overboard here. Historically, winning shares on the stock market have tended to have strong cash flows and consistent growth in earnings and profits.

Decide what type of investor you are

Investing can come in all shapes and sizes. Some people invest for income, so their focus is on dividends and established and stable business models, whereas some people invest for growth, so topline revenue growth for them is more important. 

Others prefer value investing, whereby they invest in stocks that have a margin of safety — its assets are worth more than the price of the stock. 

There are many ways to make money investing in the stock market and there is no right or wrong way. It is up to you to decide which field feels best for you and what you are most comfortable with doing. If you know you prefer a margin of safety, then investing in high-flying growth stocks that are carried on momentum rather than value won’t be for you.

You need to decide your risk factor 

Investing in stocks comes with all sorts of risk: currency risk, political risk, country risk, earnings risk, to name just a few. You need to think about the risks that you are comfortable with taking and how they can affect you.

For example, just because you are a value investor does not mean that you should invest in an undervalued gold mine in Siberia. It may have a margin of safety, but there is also a lot more risk than if the gold mine was located in a country with a friendly and stable mining environment. 

Making these three decisions should help you get started in investing. 

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Views expressed in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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