1. Make it simple
Blaise Pascal said: “All the misfortune of men comes from one thing, which is not to know how to remain at rest in a room.” This also applies to stock market investment.
Those who place orders too frequently are usually focused on unrelated data points, or seek to predict the unpredictable – an activity that produces setbacks in investment.
By staying simple, and focusing on companies that have a significant competitive advantage, applying a margin of safety when investing, and having a long investment horizon – you can greatly improve your chances of success .
2. Have reasonable expectations
You invest in the stock market with the hope of winning a lot quickly? Except to be very lucky, you will have the greatest difficulty in doubling your stake in the space of a year. Getting such results usually involves taking a lot of risk, including using leverage. If you do that, you do not invest, you speculate.
Stocks are historically the asset class that offers the best level of profitability over a long period of time – but that means a return of between 10% and 12% per year … with a high level of volatility. If you do not have the right expectations for stock market investment and acceptable volatility, you risk behaving irrationally – taking too much risk to win quickly, to intervene too often, to abandon the stock because you have experienced losses…
3. Be prepared to hold your securities for long
In the short term, stocks are volatile, reflecting the changing mood of ” Mr. the Market “. Trying to predict the evolution of the stock market is not impossible, but it is a waste of time. It is important to remember what Benjamin Graham said: in the short term, the market is a voting machine – seeking to define which societies are popular or which are not. But over the long term, the market is a weighting machine – it assesses the substance of a company.
Yet too many investors are participating in this daily beauty contest, and many are tired of seeing that the prices of some listed companies – which may have a perennial and growing business – do not move. Be patient, focus on the fundamentals of the companies in which you invest. Over time, the Exchange will always recognize the value of cash flows produced by companies.
4. Isolate from the noise of the Stock Exchange
The noise produced by the media to explain the daily movements of publicly traded securities is now reaching considerable proportions. Thousands of prices are available – oil, stocks, money rates, derivatives … – and everyone is trying to understand why this is moving. Unfortunately, these price changes are rarely linked to changes in intrinsic value. Getting away from all this noise will allow you to spend more time focusing on finding the right investment ideas and assessing the ability of companies to grow their bottom line and eventually pay you as a shareholder.
Becoming a better investor will not come from the daily reading of stock prices. Athletes and artists improve by practicing daily their art / sport. Investors are getting better and better acquainted with the companies in which they invest.
5. Behave in Ownership
Actions are not just pieces of paper to be exchanged. They represent the holding of an interest in an enterprise. If you buy a business rather than its shares, you have to behave as such. This means reading their financial publications on a regular basis, assessing their competitive strengths and weaknesses, forecasting the future of their business and building a belief rather than investing impulsively.
6. Buy low, sell high
Letting the stock market guide your actions is the world upside down. It is frightening to see the number of people buying shares only because their stock market price has risen, and it is often these same people who sell when stocks have performed poorly.
When prices fall, this is usually the time to buy. When they blaze, it is often time to sell. Do not let fear (when prices fall) or greed (as they rise) dominate your decision-making process.
7. Look where you are leaving
If you are familiar with behavioral finance, you probably know the anchor bias, which attaches your reasoning to a specific reference point. Most people pay attention to the price paid for a stock, and only evaluates their performance.
Prices are one thing, but the value of a business depends primarily on the cash flow it is able to generate. Focus on this last point. If you only consider the price paid for a security, you may take a datum that may not be relevant anymore. Watch out!
8. Economic reality is more important than management
You can be a great rally driver. If your car has half the power of the competition, you have no chance of winning. The best skipper in the world can not do much if the hull of his boat is pierced or if his rudder is broken.
Remember also that business leaders often change, while the economic realities of a business evolve much more slowly, or even are more static. If you have a choice between a company with a significant competitive advantage, which generates a lot of cash, but is poorly managed and a company without competitive advantage, generating little cash but very well managed, favor the first to the second.
9. Watch out for “snakes”
If the fundamentals of a company are important, their stewardship is equally important. Even quality companies can be bad investments if they are led by the wrong people. If you discover that the practices of the managers of a company or their mode of remuneration shock you, pay attention.
Remember the parable of the serpent. One winter evening, a man crosses a snake on his way. He said, “Can you help me please? I’m cold, I’m hungry and I’ll surely die if you leave me on the way.” The man answers: “But you are a serpent, and you will surely bite me!” The serpent replies, “Please, I’m desperate, I will not bite you!”
The man thinks, decides to take the snake with him. He heats him by a fire, prepares him to eat. Once satisfied, the snake bites the man. He asks: “Why did you bite me? I saved your life!” The serpent replied, “You knew I was a snake when you took me.”
10. Trends in the past tend to recur
One of the most remarkable views in terms of financial communication is: “past performance does not prejudge future performance. “This is true, but past performance is often a good indicator of how people will perform in the future. This is true of the managers of portfolios, but also of the managers of companies. Great leaders find opportunities in unexpected places. If a company has a strong ability to enter new markets successfully or to develop new business lines, consider taking them into account in your evaluation work. Do not be afraid to stay with leaders who have proven themselves.