This is the second installment in a series about the key rules I follow when it comes to investing. Read the first one here.
1. Do Your Research
It’s a rare thing for someone to enjoy doing homework for school. It’s often difficult to figure out how it could possibly be relevant to what you want to accomplish later in life. You may feel the same way about doing research on your stocks.
The thought of listening to a news conference or researching what analysts are looking for in certain stocks may sound both boring and daunting. In fact, if I told you that doing homework on each of your stocks could take more than an hour per week per position, you would probably look at me like I was crazy. You’re way too busy for that, right?
Most people have the desire to own stocks but have no interest in researching the companies from which they’re coming. The main reasons are usually that they don’t have time, and/or they believe if they buy them and hold them long enough, they will always reap a profit.
Speaking to the time issue: there are plenty of stock managers out there that do have the time, so why not give it to them to handle? They’re out there analyzing stocks every day, all day while your busy life is pulling you in other directions. Why not let a professional take over?
The other old school strategy that people so often use – the buying and holding one – is something that needs to be set straight. Instead of automatically assuming that if you keep a stock long enough, it will come back up, do your homework on that company before you buy into it. What are its historical trends? Listen to conference calls. Visit the company’s website. Read what news articles have been written about it. Play the role of investigator.
Reverting back to the buy-and-hold strategy will only result in you continually being beaten by professional managers that are actively doing their stocks homework every day.
2. Don’t panic
Let’s face it: when a stock takes a beating, people have the tendency to run. If there’s news the market is experiencing a major down day, or a particular sector has crashed, it’s normal to feel anxious about your funds plummeting. But that doesn’t mean you should immediately take the nearest exit.
Sometimes the best time to buy is actually in the midst of a panic. You can get stocks for extremely low prices and quickly make a few points when they go back up. Stocks such as Starbucks, Panera or Whole Foods have even caused moments of panic for some due to less-than-profitable months. But those down-5 and down-10 point situations don't need to be chased or participated in. A better time to sell will come.
Here’s my best advice for during a panic: take the opposite side of the trade. Next time you see a stock or particular sector taking a plunge, buy a little. Put your foot in the door and you’ll see what I mean. The most profitable trades you can make are the ones where the stock has been cleared out by people in a panic that don’t understand the exit doors aren’t as big as they think.
One important takeaway: I’m not trying to tell you that all stocks taking a dive are worth investing in for the long term. But it’s unusual when a stock or market that has experienced a big decrease won’t have some kind of bounce-back that allows you to trade at a better price than if you had just made a hasty exit.
3. Invest in the best
When it comes to buying a car, you want the best. You pay top dollar for the brand you want because you know that it signifies something dependent, reliable, maybe even luxurious.
So why don’t more of us follow that tendency when it comes to the stock market? Many people, for example, are drawn to the more affordable but lower quality supermarket chains instead of investing in a more upscale option like Whole Foods. Why wouldn’t you want the best of the best?
When you’re buying stocks, make sure to look at the ones that are delivering sustainable profits in their particular sector, not just the ones that cost the least. Low dollar prices may seem initially enticing, but try to find the companies that are truly the best of their breed.
Investing in a more costly stock is worth it in the end, because you know you’re buying into a high quality, proven entity. When it comes down to it, you should never mind dishing out a higher price for a better company. So don’t be afraid to pay up for the better company. I promise you won’t regret it.