Tool Kit | wealthymatters

The Right Approach To Long Term Investment Success In The Stock Market

February 24, 2011 2 Comments

There are many ways to make money in stocks. But not every way works well over longer periods of time.There are people who never make any money from stocks and there are others who make significant amounts of money in the stock market only to lose it again.To understand how to make money from stocks and keep it the long term we need t0 study the habits of investors who have remained successful over a long term.Such an exercise shows that the odds of long-term investment success are greatly enhanced with an approach that embodies most or all of the following characteristics:

Thinking about investing as the purchasing of companies, rather than the trading of stocks.
Ignoring the daily noise of the market. As Graham wrote in his classic, ‘The Intelligent Investor‘, “Basically, price fluctuations have only one significant meaning for the true investor. They provide him an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal. At other times, he will do better if he forgets about the stock market.”
Only buying a stock when it is on sale i.e. available at a discount to its intrinsic value.
Focussing first on avoiding losses, and only then think about potential gains. “We look for businesses that in general aren’t going to be susceptible to very much change,” says Warren Buffett “It means we miss a lot of very big winners but it also means we have very few big losers…. We’re perfectly willing to trade away a big payoff for a certain payoff.” Read more of this post

Filed under Paper Assets, Theory, Tool Kit Tagged with Benjamin Graham, Bill Miller, Common Sticks and Uncommon Profits, discount to intrinsic value, Legg Mason, Long term stock investment, Peter Lynch, Philip Fisher, postaday2011, RandomBlog2011, share market, stock investment, stock share, The Intelligent Investor, Warren Buffett

Have You Got It In You To Be A Good Stock Market Investor ?

February 23, 2011 5 Comments

Can you honestly say ‘YES’ to the following questions ? If so, you are cut out to be a good investor if you have good systems in place,cultivate good investing habits and gain sufficient experience.

Are You A Businesspeson ? Warren Buffett has been known to say”I am a better investor because I am a businessman, and a better businessman because I am an investor.”A businessperson understands how his/her own companies work and respond to their environments.He/she can then extrapolate this experience to look beyond the numbers of other companies.And this makes them better investors.
Are You Sufficiently Brainy ? Being a top notch investor requires a certain amount of brains-the sort of IQ that the average college graduate might have.But EQ is equally important.Too much IQ and a person will handicap himself and too little might make the constant learning associated with investing a drag.Warren Buffett has been know to say that”Success in investing doesn’t correlate with I.Q. once you’re above the level of 125. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.”
Are you good with numbers ? Advanced math such as calculus is irrelevant to your success as an investor.But you do need to master pre-university math concepts and constantly apply them in daily life while thinking about your investments.Also you should be able to seize on the most important nuggets of information in a sea of data and act upon them
Can you remain confident and humble at the same time? You need the confidence to act on your independent analysis,literally put your money on the line despite what the world round you might be doing.But on the other hand you need to be able to accept that you are not above making mistakes or missing out on something that’s obvious to others.You need the humbleness to listen to others,to stick to stocks and businesses that you understand,to stick to investing methods you know , to avoid excessive leverage and to diversify sufficiently to avoid being wiped out by a wrong call. Read more of this post

Filed under Paper Assets, Theory, Tool Kit Tagged with Heuristic Thinking, postaday2011, RandomBlog2011, stock market investing, stock market investor, stock share, successful stock investing, Templeton

Dealing With The Shortcomings Of The Human Brain

February 21, 2011 2 Comments

Since we can’t overcome the tendency of the human brain to make mistakes while working through heuristics , here is a list of things we can do to reduce the effects of the shortcomings of the human brain.The more we can incorporate these points into our investing procedures and systems , the better the quality of our returns.The checklist is form Whitney Tilson’s ‘How to Avoid – and Profit From – Manias , Bubbles and Investor Irrationality’.

•Be humble–Avoid leverage, diversify, minimize trading

•Be patient

–Don’t try to get rich quick

–A watched stock never rises

–Tune out the noise

–Make sure time is on your side (stocks instead of options; no leverage)

•Get a partner

–someone you really trust –even if not at your firm Read more of this post

Filed under Paper Assets, Theory, Tool Kit Tagged with bearish, behavioural finance, circle of competence, contrary opinions, diversify, get rich quick, good business, heuristics, How To Avoid and Profit From Manias Bubbles and Investor Irrationality, leverage, randomness, regression to mean, Stock Share Investing, stocks, Whitney Tilson

Psychology And Bad Market Timing.

February 21, 2011 2 Comments

Every stock investor whether a technical or fundamental or value investor ultimately needs to take a call on whether he/she wishes to buy or sell at the price Mr. Market sets at any given time.How much an investment ultimately nets a person depends on the timing of the buy and sell decision and the actual price at which the transaction takes place,despite all the theories of averaging out and time in the market and reversion to the mean.

The following is a checklist of mental mistakes that may affect a person’s decision to buy or sell and cost a him/her dearly. The checklist is from Whitney Tilson’s presentation ‘How to Avoid – and Profit From – Manias,Bubbles and Investor Irrationality”

•Failing to Buy

–Status quo bias

–Regret aversion

–Choice paralysis

–Information overload

–Hope that stock will go down further (extrapolating recent past into the future; greed) or return to previous cheaper price (anchoring)

–Regret at not buying earlier (if stock has risen)

•Office Depot at $8 (vs. $6) Read more of this post