What skills and abilities do you need to succeed in today’s financial markets? This is a question that rookie investors ask themselves before they start out on their investing journey, but it’s also something I’ve noticed the best investors in the world keep asking themselves. The key point is that successful investing means getting into good financial habits, and this in turn can only happen when you’re in the right frame of mind.
Learning to make good decisions doesn’t just happen overnight! You need to train your analytical abilities to ensure you can make good decisions more often than you make bad ones (because every investor sometimes gets it wrong!). In this article, we take you through 6 key ideas about how to optimize your thought processes for investment success.
How To Become A Good Stock Investor
1. Be objective!
This might sound obvious, but trust me it’s much harder to do in practice than it sounds! In the financial markets, everyday investors are bombarded with data and information. This will come from a wide range of sources, cover an enormous range of topics, and may very well be of variable quality and reliability.
The first key skill you need to start training as an investor is the ability to take in all this info, process it, and then try to form an objective or balanced opinion of it. For instance, maybe you’ve read three reports on a stock – two say it’s great, one says it trash.
You therefore need to decide for yourself whose opinion you will give most weight to, as this will determine whether you buy or sell, and in what quantities. It’s easy to get carried away when we see a stock price soaring and assume this is going to carry on indefinitely.
However, history teaches us this is almost never the case! As much as possible, try to always find and consider a counter-argument to any investment position you are thinking of taking – this could save you a lot of pain later!
2. Be fearless!
Secondly, and this might sound a bit contradictory with the first piece of advice, you also need to be brave. By this I mean, you do need to have the courage to actually ‘pull the trigger’’ and make the trade once you’ve been objective and decided it is what you want to do. Many early investors struggle with this.
It actually has a name: analysis-paralysis! If you have considered a trade from different points of view, done your research and are happy to go ahead understanding the risks, then you do need to be fearless and go with your ideas. If not, you’ll spend forever analyzing and the market will have oved on by the time you’ve acted… Don’t get left behind!
3. Be honest!
Good advice for life in general, this couldn’t be truer of investing. If you’ve made a mistake, and stock you’ve invested in his sunk, be honest with yourself. Look for the reasons why this happened, and try to understand what led you to overestimate its chances.
If you can find compelling reasons why the stock will recover, then stock with it. In fact, if you still like the stock on second looking, then you might even want to ‘buy the dip’, as they say. However, if your second look makes the stock look less attractive, then it’s always best to admit your mistake and close out your position.
Being honest about when you’ve got it wrong will help you learn from your mistakes, and it will also save you a lot of money over the course of your investment career.
4. Be adaptable!
This follows on from and links to the above point. Markets move incredibly fast, and new information is always becoming available.
This means that last months or even last weeks analysis may no longer be relevant today. If the market has moved and your stocks have been left behind, be ready to switch your positions. This is another way of saying don’t get emotionally attached to numbers and letters on the screen!
It might be your favourite stock, but if the situation has changed, then you have to be willing to change with it. As above, being adaptable will in the long run save you a whole lot of money.
5. Be original!
Next up, an underrated concept in investment analysis – you have to be willing to leave the crowd from time to time to stand alone. Sometimes, everyone in the market is dashing in one direction – maybe everyone is buying a new hot stock, or at other times everyone is selling something that’s fallen out of fashion. Sometimes it’s fine to go along with this trend.
However, every so often the prevailing market sentiment on a stock will be wrong! These are the times you need to be on the alert, and be ready to move in the other direction. To be fair, such opportunities are relatively rare, but when you do come along you can make a killing.
6. Be disciplined!
Last but not least, you need to be disciplined in your investing. This means understanding how much you can invest on a month-by-month basis, and therefore also understanding what you can afford you lose. You need to keep track of your profits and loses accurately and in a timely manner, too.
Being disciplined will mean that you are deploying your capital in the most effective way possible, rather than randomly chasing after whatever has been in the headlines that morning. Many beginner investors suffer by being too shortsighted and unstructured in their approach.
Make sure this doesn’t apply to you by setting yourself a strict regime and following it closely. This could involve limited how much money you will add to your account each month; setting time limits for how long you will research each stock; limited the number of trades you make each day; limiting the total number of stocks you will hold at any given time; etc.
These sorts of rules will stop your investment approach from being too chaotic and random – good investment strategies begin with good discipline!
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