Much of my investment strategies stem from fundamental investing and value investing. I adopt strategies similar to 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 experience investing in stocks than you. Rather, seek to think, analyze, and read more on your own before deciding which strategy best suits your needs. Once you’ve developed your own investment philosophy, stick with it and trust only yourself.
My investment philosophy
1. Don’t lose money.
As many people already know, Warren Buffett presented his two rules of stock investing in a humorous way in which rule number 1 is “Never lose money” while rule number 2 is “Don’t forget rule number 1” .
Preserving capital is important because a stock that has lost half its value will need to double in value before returning to where it started. This is why you need to be extremely cautious in your choice of actions and that brings us to rule number 2.
2. Have a margin of safety
The margin of safety, simply put, is a buffer that you place between what you perceive as the value of the stock and its price. If you value a stock at $ 1 and only buy it if its price is 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 matter in itself.
In short, a margin of safety is necessary to protect your capital in case you are wrong in your initial assessment of a security selection. That way, even if you were wrong, you would have bought the stock at a much lower price than if you hadn’t had a margin of safety.
3. Invest for the long term
There is no way to time the market, but many people seem to think otherwise. They buy when stocks fall slightly and hope to be able to sell them in the near future for a profit. These people often adopt a “hit and run” strategy in which they are content to earn about $ 100 each time they trade. They also have a loss reduction strategy in which they will exit the market if the price falls beyond a certain amount within days of buying the stock.
The truth about the stock market is that you make real money in just a few days. If you frequently enter and exit the market, it is likely that during the few days of a real spike in price, you will not be in the market, thus losing profit.
Investing for the long term also saves you commissions paid to the broker, capital gains taxes, and puts the power of compounding into play. The difference between trading in the market and buying long-term is significant and should not be ignored.
4. Know when to sell and when not to sell
Although I advocate investing for the long term, that doesn’t mean keeping my investments forever. When I value a stock, I already have in mind how much the stock is worth and therefore I already have an exit price in mind. The purpose of investing in value is to buy these stocks at a significant discount to their value.
However, there may be times when the market is euphoric and the price of stocks rises far beyond what I have valued them. At this time, I will reassess the company to see if I have missed any news or key factors that may be responsible for the price increase. If my valuation of the company remains the same, I will sell the shares because there is no reason not to take advantage of the madness of the market.
It is important not to be greedy at this point and to keep increasing the starting price that 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 the price of a stock falls, 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 even more discounted than the one you previously bought. In this case, you should take the opportunity to buy more of these stocks.
5. Carry cash when there are no good deeds 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 moment they have some cash in hand, they want to buy some stocks because if not, they feel they are not in the market and therefore they are 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 must average and buy more shares. The worst thing that can happen to you is not having cash to average a purchase that has now presented 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 selection. Many people spend much of their time checking the prices of stocks they have bought several times a day. It is best 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 a lot of people are guilty of this, as I clearly see in my workplace, where everyone has a little window open to check stock prices from time to time.