Much of my investment strategies stem from fundamental investing and value investing. I adopt strategies similar to those of Warren Buffett not only because he is a well-known investor, but because they make more sense to me.
That is the key to successfully investing in stocks. Don’t listen to anyone just because you think they have more stock investing experience than you. Rather, seek to think, analyze and read more on your own before deciding which strategy suits you best. Once you have developed your own investment philosophy, stick to it and trust only yourself.
My investment philosophy
1. Don’t waste money.
As many people already know, Warren Buffett laid out his two rules in stock investing in a humorous way where rule number 1 is “Never lose money” while rule number 2 is “Don’t forget rule number 1”. .
Capital preservation is important because a stock that has lost half its value will need to double in value before it returns to where it started. This is why you need to be extremely cautious in your stock choices and that brings us to rule number 2.
2. Have a safety margin
The margin of safety, simply put, is a buffer you place between what you perceive to be the value of the stock and its price. If you value a stock at $1 and only buy it if it is priced at 50 cents, then your margin of safety is 50 percent.
Deciding how much margin of safety to give a stock varies for companies in different industries and is another topic in itself.
In short, a safety margin is necessary to protect your capital in case you are wrong in your initial assessment of a stock selection. That way, even if he was wrong, he would have bought the stock at a much lower price than if he hadn’t factored in a safety margin.
3. Invest for the long term
There is no way to time the market, but many people seem to think otherwise. They buy when the stock goes down a bit and hope that in the near future they can sell it for a profit. These people often adopt a “hit and run” strategy where they are content to win about $100 every time they make a trade. They also have a stop-loss strategy where they will exit the market if the price drops beyond a certain amount within a few days of buying the stock.
The truth about the stock market is that real money is made in a few days. If you enter and exit the market frequently, chances are that during the few days of an actual price increase, you will not be in the market, thus losing profits.
Investing for the long term also saves you broker commissions, capital gains taxes, and brings the power of compounding into play. The difference between trading in the market and buying for the long term is significant and should not be ignored.
4. Know when to sell and when not to sell
Although I advocate long-term investing, that doesn’t mean holding on to my investments forever. When I value a stock, I already have in mind how much the stock is worth, and therefore I already have a starting price in mind. The purpose of value investing is to buy this stock at a significant discount to its value.
However, there may be times when the market is euphoric and the share price rises well beyond what I have valued. At this time, I will re-evaluate the company to see if I have missed any key news or factors that could be responsible for the price increase. If my valuation of the company stays the same, I’ll sell the stock because there’s no reason why I shouldn’t take advantage of the market madness.
It is important not to be greedy at this point and keep increasing the starting price you have set. Have a starting price and stick to it.
The opposite also is true. Most people panic and sell when the price drops and that doesn’t make sense. When a stock price drops, check the fundamentals again. If nothing has changed, then your assessment of its value should be the same and this means that the stock is at an even greater discount than the one you previously bought. In this case, you should take the opportunity to buy more shares of this type.
5. Carry cash with you when there are no good stocks to buy
There are many reasons to carry cash when there are no good stocks to buy. Many people find it difficult to do that. The minute they have some cash in hand, they want to buy some stock because if they don’t, they feel like they’re not in the market and therefore not “investing.”
Also, having cash with you allows you to capitalize on sudden drops in stock prices due to some market fluctuations that are not the result of a change in company fundamentals. In these cases, you should average down and buy more of that stock. The worst thing that can happen to you is not having cash to average a purchase that now has a greater discount than before, due to your need to always keep all your money in the market to “feel that you are investing”.
Summary
Investing is not just about buying stocks. The homework and preparation behind identifying which stocks to buy is the real key factor in successful stock picking. Many people spend a lot of time checking the prices of the stocks they have bought several times a day. It is better to spend that time researching the company and its business. Ultimately, checking the price of a stock several times a day will not influence the price or the fundamentals of the company. But I’m sure many people are guilty of this, as I see clearly in my workplace, where everyone has a small window open to check stock prices from time to time.