Do you want to be a successful investor? Well, good news! You don’t need a superior intellect, be a math genius, or possess a CFA to be one. However, what you do need is a level of emotional stability and a set of key principles to guide your decisions. Like this guy said…
“If you are in the investment business and have an IQ of 150, sell 30 points to someone else. You do have to have an emotional stability and an inner peace about your decisions.” – Warren Buffett
Without a set of guiding principles, it’s easy to get lost among all the noise — you’ll get easily swayed by the opinions of others; you’ll buy on excitement and sell on fear; you’ll make bigger bets after a run of good luck, only to lose everything and start back at square one.
Remember, being a successful investor is not about making the most amount of money in the shortest possible time, but about building your wealth in a safe and sustainable manner for a lifetime. And to do so, we all need a set of guiding principles that can stand the test of (a life)time.
Therefore, here are the five key principles you must possess to become a successful investor.
The existence of the stock market is for companies to raise capital and to create a market for investors to buy and sell their shares. However, the liquidity provided by the stock exchange and the ease of electronic trading makes it easy for people to forget that owning shares literally represents a part-ownership stake in a real business, not digital coupons that you trade back and forth in hopes of turning a quick profit.
When you see yourself as a potential business owner when buying a stock, you will naturally evaluate a company based on its long-term economic prospects. You will then start to ask questions like:
Answering these questions and more will help you focus only on high-quality companies that are worth investing in for the long term.
While you don’t need to have genius-level IQ to be a successful investor, you still need to base your investment decisions on sound logic. How many times have you come across people who make their decisions based on their gut emotions and how they feel? They buy high-priced stocks at the peak of euphoria and panic-sell when the market crashes. I don’t know about you but buying high and selling low seems like a sure-fire way to lose money in the stock market to me.
When you are swayed by your emotions, you can’t rationalise your next course of action when something affects your business. If a company suffers a drop in profit and a fall in share price, is the setback temporary or permanent? If a company’s share price is soaring skyward, is it backed by solid fundamentals and is it an irrational market pushing the price even higher? Knowing the answers to these questions requires a good amount of research and deduction before you can make a well-informed and logical decision.
If you cannot tell the difference between a positron-emission tomography (PET) and a computed tomography (CT) scanner, then should avoid probably investing in the medical equipment industry; it is outside of your circle of competence. But you’d be surprised at the number of people who will readily invest in oil rig machinery, cloud enterprise software, mixed-signal integrated circuits, geo-energy solutions, or chemical product lines just for a small chance of profit when they know next to nothing about those industries.
Investing is all about parking your money in an asset that will become more valuable in the future. If you don’t understand the business and the industry it operates in, you cannot accurately assess the economic factors and potential risks associated with your investment. And, in fact, you’d be at a serious disadvantage compared to the investors who do.
Turning that around, why not invest in companies/industries that you’re already familiar with and have an informational advantage in? If you’re an expert in social media and digital advertising, then Facebook and Google should be stocks for you to look at. If you work in the hospitality line, then companies like Marriot International or Booking should be your focus at the start. This way, you give yourself the best possible chances of making money from your investments.
You have to invest with the mentality that the stock market is going to crash tomorrow. With that mindset, you would want to invest in companies whose earnings are resilient in the face of downturns. Because recession or not, people will continue to buy Head & Shoulders shampoo and Gillette shaving blades from Procter & Gamble. (And if you’re the type that doesn’t wash or shave during a recession, then remind me to keep 10-feet radius from you when the economy tanks.)
Since you invest in companies that are within your circle of competence, you will also know the variables that could affect their business. Whether it’s an increase in interest rates or the price of raw materials, a change in consumer preferences, or a supply chain disruption, you’d be able to tell if the situation is temporary (which signals an opportunity) or if the company/industry is in permanent decline. And always make sure you invest in companies with a fortress-like balance sheet (i.e. low debt) that can weather any downturn or temporary setback.
As long as a company is generating steady and consistent earnings and its fundamentals remain intact, you should ignore its day-to-day fluctuations and invest with a five- to 10-year horizon in mind. That way, you can let the power of compound interest multiply your money.
During the 50-year period from 1960 to 2009, the S&P 500 returned an average of 10% (capital gains plus dividends) annually. If you had simply bought the index and held on through the OPEC Oil Price Shock of 1973, the Asian Financial Crisis of 1997, the Dotcom bubble of 2000, and the Subprime Mortgage of 2008, your $10,000 investment would have ballooned to $1.17 million. Who says it doesn’t pay to sit and home and twiddle your thumbs?
Okay, let’s say you’re that unlucky Joe that happened to invest at the peak right before market crash (9 Oct 2007) and held it till today. A $10,000 investment in the S&P 500 would still have yielded a profit of $8,550 over ten years — a return of 85.5%.
S&P 500 – 9 Oct 2007 to 13 Sep 2018. Source: YCharts
Not so unlucky anymore, huh?
The key takeaway is you don’t have to be a professional to become a successful investor. One of my inspirations is Ronald Read, a janitor and gas station attendant, who managed to build an $8-million-dollar portfolio which he willed to charity when he passed away. Read amassed a fortune simply by investing in a portfolio of stocks and holding it over a long period of time. So, if someone like Ronald without a six-figure income can do it, I’m sure you can too!
https://fifthperson.com/5-principles-of-highly-successful-investors/
Created by Tan KW | Jul 28, 2024
Created by Tan KW | Jul 28, 2024
5. Keep a long-term perspective..this is the best. A janitor can do it, so can most of us. Thanks for a good article.
2018-09-14 11:13
Excellent points. Sadly, only a few have the temperament to use these profitably.
I am surrounded by people, the majority of them can only share stories of their losses in the stock market in the past and are not surprisingly no longer invested in the stock market for the long term.
2018-09-14 16:07
Depends on what stocks you hold. Make sure it's a fundamentally strong stock with good dividends and popularity.
2018-09-15 23:28
not bad....I have some role models in mind.....
1. Think like a business owner, ticked
2. Logic over emotions, ticked, ticked
3. Stay within your circle of competence, ticked
4. Always protect your downside
5. Keep a long-term perspective
4 and 5 very difficult to reconcile.
Genuine investors should hold long term, 3 years and above and aim for multiple baggers..............
Traders got traders rules
2018-09-15 23:44
Malaysia is not America....the total market size for successful companies to grow is limited..............
in America if just 1 in 10 companies in your portfolio hits a home run, your portfolio will do well
in Malaysia...that may not be the case.
2018-09-15 23:51
Qqq3,
If one ever needs proof of one's mind being dead to change once one has passed their fifties. Even when presented evidence.
Can just go read your comments.
2018-09-16 00:42
qqq3 > Sep 16, 2018 12:28 AM | Report Abuse X
the danger of just regurgitating American books.
choivo......guilty as charged.......not, not me......but....
the danger of just regurgitating American books.
2018-09-16 00:51
American stock market and Malaysian stock market is very different....
every thing is different...tax laws are different.....and growth opportunities and growth limits for successful companies are different.
2018-09-16 00:53
choivo
not saying cannot make money in Bursa
but also true
Posted by qqq3 > Sep 15, 2018 11:51 PM | Report Abuse X
Malaysia is not America....the total market size for successful companies to grow is limited..............
in America if just 1 in 10 companies in your portfolio hits a home run, your portfolio will do well
in Malaysia...that may not be the case.
also
America has tax laws that discourages trading....Malaysia no such laws.
2018-09-16 14:40
choivo
there are subtle differences which have consequences....due to size of market,in America u can still get multiple baggers getting into well known brands and companies with track records and history.
In Malaysia, u want multiple baggers u got to take higher risks, get in earlier...the net result have higher failure rates.
2018-09-18 09:36
we have companies that do export businesses too. so theres not really a limit
2018-09-18 09:43
above books are written by and for American markets, our market is suitable for traders
2018-09-18 09:47
trading is double edged sword.....
trading ( compared to buy and hold) , u flip your portfolio faster, if you are good, u make more money, lousy, u lose more money
2018-09-18 09:55
alot of locals treat share trading as an option for quick profit not view as a long term hold (asset investment ).
2018-09-18 10:09
Jonathan Keung > Sep 18, 2018 10:09 AM | Report Abuse
alot of locals treat share trading as an option for quick profit not view as a long term hold (asset investment ).
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the idea is to make money....doesn't matter cat is white.....
why this forum everybody pretends to be asset investment when everybody is a trader?
2018-09-18 10:31
asset investors got asset investor rules
traders got trader rules.
lets be clear about one thing....
unless u intend/ willing to buy and hold for 5 years and at least see double in the stock price.....u are a trader...so use trader rules la.......forget about your asset investor rules.
2018-09-18 10:39
people mix up in their heads....
calling themselves value investors but no desire to buy really undervalued shares......
apply value investor rules for entry but sell with 10% profits......
all kinds of getting mixed up in the brain.....
praise kc chong, ridicule traders....but they themselves are 100% traders in my definition........and they don't even realise it.....
hang pig head sell dog meat......
talk East go West....
no good......getting confused is not a good way to go about making money.......
2018-09-18 10:45
look at all the teachers....can they make money? no
look at all the people who succeeds in stock market......what they have in common?
two words......honesty and know thyself
honesty to one self, know thyself....all in front of you can be conquered...otherwise stock market will conquer you.
2018-09-18 11:02
secrets to success?
- honesty and know thyself
- keep it simple
- business sense
2018-09-18 11:05
Jonathan Keung
fully focus and committed is equally important
2018-09-14 10:51