20 Stock-Investing Tips|
6. Buy Low, Sell High.|
If you let stock prices alone guide your buy and sell decisions, you are letting the tail wag the dog. It's frightening how many people will buy stocks just because they've recently risen, and those same people will sell when stocks have recently performed poorly. Wakeup call: When stocks have fallen, they are low, and that is generally the time to buy! Similarly, when they have skyrocketed, they are high, and that is generally the time to sell! Don't let fear (when stocks have fallen) or greed (when stocks have risen) take over your decision making.
7. Watch Where You Anchor.
If you read Lesson 407 on behavioral finance, you are familiar with the concept of anchoring, or mentally clinging to a specific reference point. Unfortunately, many people anchor on the price they paid for a stock, and gauge their own performance (and that of their companies) relative to this number.
Remember, stocks are priced and eventually weighed on the estimated value of future cash flows businesses will produce. Focus on this. If you focus on what you paid for a stock, you are focused on an irrelevant data point from the past. Be careful where you place your anchors.
8. Remember that Economics Usually Trumps Management Competence.
You can be a great racecar driver, but if your car only has half the horsepower as the rest of the field, you are not going to win. Likewise, the best skipper in the world will not be able to effectively guide a ship across the ocean if the hull has a hole and the rudder is broken.
Also keep in mind that management can (for better or for worse) change quickly, while the economics of a business are usually much more static. Given the choice between a wide-moat, cash-cow business with mediocre management and a no-moat, terrible-return businesses with bright management, take the former.
9. Be Careful of Snakes.
Though the economics of a business is key, the stewards of a company's capital are still important. Even wide-moat businesses can be poor investments if snakes are in control. If you find a company that has management practices or compensation that makes your stomach turn, watch out.
When weighing management, it is helpful to remember the parable of the snake. Late one winter evening, a man came across a snake on the path. The snake asked, "Will you please help me, sir? I am cold, hungry and will surely die if left alone." The man replied, "But you are a snake, and you will surely bite me!" The snake replied, "Please, I am desperate, and I promise not to bite you."
So the man thought about it, and decided to take the snake home. The man warmed the snake up by the fire and prepared some food for the snake. After they enjoyed a meal together, the snake suddenly bit the man. The man asked, "Why did you bite me? I saved your life and showed you much generosity!" The snake simply replied, "You knew I was a snake when you picked me up."
10. Bear in Mind that Past Trends Often Continue.
One of the most often heard disclaimers in the financial world is, "Past performance is no guarantee of future results." While this is indeed true, past performance is still a pretty darn good indicator of how people will perform again in the future. This applies not just to investment managers, but company managers as well. Great managers often find new business opportunities in unexpected places. If a company has a strong record of entering and profitably expanding new lines of business, make sure to consider this when valuing the firm. Don't be afraid to stick with winning managers.
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