Over the years, master investors like Warren Buffett and Peter Lynch have served as role models and inspiration to people to invest wisely.
And i can’t help but notice a few winning habits which are similar to different legendary investors out there.
If you wish to emulate their success when it comes to investing, it pays attention to practise these 5 Golden Rules:
Do Due Diligence
Peter Lynch once said that “One should not invest in something that he/she does not fully understand.”
Before pulling-out money from your pocket, you should do your homework on the company you are investing in. Take for example – Old Chang Kee.
As a curry puff lover, I frequently patronize Old Chang Kee stalls in the shopping mall. However, when i check out their financial results, they do not paint a good picture as profits are ‘eaten’ up by the increasing rental costs.
Invest in Quality Companies
Why would someone not choose to put his money in good companies (aka. bad companies)? This is due to various reasons like predicting what the market will do next or thinking that the beaten down stock has hit a trough and rebound soon (e.g. my favourite stock – noble group).
As per the Arborinvestmentplanner, quality companies demonstrate characteristics like
- Good management
- Strong balance sheet
- An enterprise lifecycle on the upswing
- An economic moat
- Sound dividend policy
- Stable earnings and
- Efficient operations.
Most importantly, you should hold good quality companies over the long run; which brings us to the next point.
Invest for the Long Run
Question: Guess the probability of you making losses if you held STI over the past 20 years?
Answer: 0%. Yes! You will not lose money, in fact, history has shown that STI Index returns a total of 8% (inclusive of dividends) compounded annually over the long run.
That is why master investors like to dig deep into their thesis and will hold them for the long haul. It prevents them from guessing where the market is heading in the short run and allows them to think in the long run.
This is also how the disciple of Benjamin Graham, Warren Buffett always seem to pick undervalued bargain stocks when everyone else is running away in fear.
Indeed, one should not depend on market timing wherein investors invest somewhere near the bottom of the market cycles and then get out when it is near the top. Money flows up and down that it is why what should one consider is investing long-term instead.
Own Unique System
Every Master Investor has developed and tested his own personal system for selecting, buying and selling investments. Be it Warren Buffett, George Soros or even Jesse Livermore (legendary trader), they have become millionaires/billionaires after investing successfully using their own system.
Buffett aims to buy a dollar of value at a bargain price with margin of safety. His criteria for investing can be summed up as: Quality business at the Right Price.
On the other hand, George Soros aims to profit from a change in Mr. Market’s mood. He bases his investment decisions on a hypothesis about the coming course of events – Just like how he broke the Bank of England with his $1 Billion bet against British Pound.
How about you? Do you want to create your own winning system on how to choose, buy and sell stocks?
Click on the link here and download a FREE 10-step guide to create your own winning system.
Learn from mistakes
Last but not least, as an investor, you will be facing mistakes all the time. Selling a winning stock too early, Buying because your friend says its the next big thing and much more.
Even the Oracle of Omaha, Warren Buffett makes mistakes. Big ones in fact, due to his behemoth empire under Berkshire Hathaway. Here is an excerpt from the Guardian – Billionaire investor Warren Buffett has admitted that “thumb-sucking” over selling his Tesco stake cost $444m (£287.6m), one of the biggest losses in his investment company’s history.
Hence, it is wise to document down your mistakes and learn from them. Just make sure you emerge better than before.
This article was written by James Yeo.