Wednesday, 2 September 2009

Some Investing Principles which cannot be disputed

While it may be true that in the online investing world there is no rule without an exception, there are some principles which cannot be disputed. These principles can help investors get a better grasp of how to approach online investments and nurture them to maturity.

Sell the losers and let the winners keep riding
For long term investing success it is important to ride a winner. Ever so often, investors make profits by selling their appreciated online stocks, but hold onto stocks that have declined in hopes of a rebound. If an investor doesn't know when it's time to let go of hopeless stocks, he or she can, in the worst-case scenario, see the stock sink to the point where it is almost worthless. Of course, the idea of holding onto high-quality investments while selling the poor ones is great in theory, but hard to put into practice.

If you have a personal preference to sell after a stock has increased by a certain multiple - say three, for instance - you may never fully ride out a winner. No one in the history of investing with a "sell-after-I-have-tripled-my-money" mentality has ever succeeded.. Don't underestimate a stock that is performing well by sticking to some rigid personal rule - if you don't have a good understanding of the potential of your investments, your personal rules may end up being arbitrary and too limiting.

While riding a winner is important, you also should sell the losers. There is no guarantee that an online stock will bounce back after a long period of decline. While it is important not to underestimate good stocks, it is equally important to be realistic about investments that are performing badly. Recognizing your losers is hard because it's also an acknowledgment of your mistake. But it's important to be honest when you realize that a stock is not performing as well as you expected it to. Don't be afraid to swallow your pride and move on before your losses become even greater.

In both cases, the point is to judge companies on their merits according to your research. In each situation, you still have to decide whether a price justifies future potential. Just remember not to let your fears limit your returns or inflate your losses.

Learn to give a cold shoulder to hot tips
Whether the tip comes from your brother, cousin, neighbor or even online broker, no one can ever guarantee what online stocks will do. When you make an investment, it's important you know the reasons for doing so. Conduct your own research and analysis of any company before you even consider investing your hard earned money. Relying on a hot tip from someone else is not only an attempt at taking the easy way out, it is also a big gamble. Sure, with some luck, tips may sometimes pan out. But they will never make you an informed investor, which is what you need to be to be successful in the long run.

Don't panic when shares experience short-term movements
As a long term online investing strategy, you should not panic when your online investments experience short-term movements. When tracking the activities of your investments, you should look at the big picture. Remember to be confident in the quality of your investments rather than nervous about the inevitable volatility of the short term.

Day traders will use these day-to-day and even minute-to-minute fluctuations as a way to make gains. But the gains of a long-term investor come from a completely different market movement - the one that occurs over many years - so keep your focus on developing your overall investment philosophy by educating yourself.

Do not overemphasize the P/E ratio
Investors often place too much importance on the price-to-earning (P/E) ratio in their online investing strategy. It is one key tool among many. Using only this ratio to make buy or sell decisions is dangerous and ill-advised. The P/E ratio must be interpreted within a context, and it should be used in conjunction with other analytical processes. So, a low P/E ratio doesn't necessarily mean a security is undervalued, nor does a high P/E ratio necessarily mean a company is over valued.

Resist the temptation of penny stocks
A common misconception is that there is less to lose in buying a low-priced stock. But whether you buy a $5 stock that plunges to $0 or a $75 stock that does the same, either way you'd still have a 100% loss of your initial investment. A penny stock is probably riskier than a company with a higher share price, which would have more regulations placed on it.

Stick to your strategy
Online stock investors use different methods to pick stocks and fulfill investing goals. There are many ways to be successful and no one strategy is inherently better than any other. However, once you find your style, stick to it. An investor who switches between different stock-picking strategies will probably experience the worst, rather than the best, of each. Constantly switching strategies effectively makes you a market timer, and this is definitely territory most investors aiming at long term strategies should avoid.

While these suggestions cover some critical strategies for long-term online investments there is an exception to every rule. Depending on your circumstances, use these principles within the framework of your overall investment strategy, and reap the benefits of long term online investments.

No comments: