When investing, it is always to your advantage to disregard all of the media stories that are designed to induce fear and panic.
Instead, take a step back, remain calm, and assess whether you are still on the right path towards meeting your investing goals.
Here are some good tips for getting and staying on track:
1. Concentrate on processes rather than outcome
Especially over the short term, luck does factor into the success of an investment. You can never be sure that any investment will be profitable.
In addition to maintaining a diversified portfolio, concentrate on the process of analysing a stock rather than focusing on the performance of the stock. This applies to not only when you are losing money, but also when you are making a profit.
As time goes on and you have had the experience of making a number of investment decisions, luck will play a lesser role and your skill becomes more influential.
2. Don’t let uncertainty hold you back
Stocks that are cheap become cheaper when investors take a wait and see approach. They want to take a step back and try to gain a better understanding of a company’s prospects.
However, while the investor is waiting for the uncertainty to disappear, many opportunities for bargains will pass them by while other investors jump on the stock. It is hard to buy a cheap stock and then watch it get even cheaper but you will need to accept that it is unlikely that you will pick the bottom.
Therefore make your initial purchase for a fraction of the total investment you intend to make. If you do that, you will have enough money left to purchase at lower prices and, if the stock does rise, you win either way.
3. What do you have to lose?
We all like to think about how much of a profit we can make, but to be successful, we also need to think about how much we can lose and the probabilities of each scenario ( in mathematical terms, ‘expected value’).
An example of what happens when investors don’t go through this process can be seen when looking at those who invested in stocks such as Tesla (TSLA).
Investors in these high-growth, high-risk stocks need to consider whether these companies’ current prices are an accurate prediction of their future growth prospects and the potential risks they may encounter:
- Will they face problems (supply issues or errors in management) as they grow?
- Will they live up to the expectations of the investor?
- What about the effect of increased competition on future returns?
Never forget that soaring stocks tend to become more reasonably priced over time, even if the actual growth is very high, but less than expected.
4. Don’t give in to fear and shock.
Many investors panic upon seeing their stocks fall and the first thing they rush to do is sell.
This is exactly the opposite of what should be done.
Rather than succumbing to fear, shock, and possibly mistakes of the past, review your stocks and see if your stocks at their current prices have better value.
If they do, think about purchasing more.
5. Opportunities can grow from forced selling
The reason for why a stock becomes cheap is often irrational.
Professional investors might be forced to sell if a stock is kicked out of an index or cancels its dividend. This is because they are no longer permitted to own such stocks.
However, for investors that are not bound by these limitations, this can be a terrific opportunity.
6. Maintain a margin of safety
A margin of safety is defined as buying a stock at a discount to the conservative estimate of its intrinsic value.
The decision-making process involved in making an investment should place risk management (the probability of loss rather than volatility) at its core.
7. In the long term, valuation is what matters
In the short term, investors might not pay attention to the valuation of a stock and how it relates to price (such as when the market soars or panic sets in), but valuation is the primary factor in determining returns in the long term.
This applies to cheap stocks as well as expensive ones and usually, better outcomes result from the less expensive stocks rather than the pricier ones.
8. Success takes patience
Successful investors have one thing in common, and that is long term thinking.
You can make a wrong decision in the short term and see the stock you purchased decline, but it could be correct for the long term as the price of the stock moves in the direction of its intrinsic value.