Patience is a virtue you must learn in order to excel as a value investor. You must think outside the box and move in a direction the crowd likely is not following.
If you want to invest intelligently according to the basics established by value investing master guru Benjamin Graham, you must control the following:
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If you want to invest intelligently according to the basics established by value investing master guru Benjamin Graham, you must control the following:
- Your brokerage costs
- Your ownership costs
- Your expectations
- Your risk
- Your tax bills
- Your own behaviour
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1. Your Brokerage Costs
Find yourself a good broker who doesn't charge too much to handle your stock trades. If you feel confident that you know how to handle stock trading, do it yourself with an Internet discount broker.
We don't recommend full-service brokers because you don't need their research services and you certainly won't want to follow their advice - unless by some lucky break you find a broker who truly believes in value investing.
Also, don't trade too often and waste your money jumping in and out of stocks. Most value investing gurus hold on to stocks for four to five years.
Learn to be patient and give a stock you've picked time to recover. Its price may go down after you buy the stock, so don't get discouraged. Few people can actually buy at the absolute lowest price. Most value investors choose a stock on its way down.
But don't be so patient that you end up losing all your money. Sometimes, you will make a mistake when picking a stock. Just admit your mistake, accept your losses and move on.
2. Your Ownership Costs
If you decide to invest using mutual funds, be sure to buy no-load funds with very low management fees. Few funds are worth the cost if their management fees are more than 1 percent.
Remember, for a mutual fund manager to meet the returns of a stock market index, he or she must beat the index by at least the cost of the mutual fund's management fees. Management fees are a drain on all mutual funds.
Unless for some reason you've picked a particular mutual fund manager you want to follow, your best bet is to invest using an index fund. Fees for many index funds are just 0.15 to 0.35 percent.
3. Your Expectations
Always be realistic about the returns you want to get out of a stock purchase. Even if you decide to follow some newsletters that specialise in value investing, don't get caught up in someone else's hype. You'll never be disappointed if you carefully assess the true value of a stock and are conservative about the cash flows you can expect from the stock purchase.
4. Your Risk.
Keep a close eye on the amount of risk you can tolerate. Determine the asset allocation that best manages your risk tolerance.
Periodically re-balance your portfolio so you know that you're maintaining your portfolio at a risk tolerance level that you can tolerate.
Determine how much of your portfolio you can afford to put at risk. Stock investing is a risky business. You can afford to take more risk if you have a longer time frame before you need the money.
For example, if you won't need the money for 10 years or more, you can take on the greatest amount of risk. If you plan to use the money in two years, put that money in a cash account.
5. Your Tax Bills
Each time you sell a stock, you may have to pay taxes on the amount of profit you make from the transaction. If you hold a stock for less than 12 months, the taxes you pay are based on your current tax rate.
If you hold a stock for more than 12 months, your tax bill could be as little as 5 percent for capital gains, if you are in the 10 percent or 15 percent tax brackets. You'll pay 15 percent capital gains tax if your tax bracket is 25 percent or higher.
Unless you've made a terrible mistake picking a stock, you should always hold it for more than a year, to minimize the tax hit on any gain. The only exception to this rule is fi you have a significant profit in a stock and you're afraid the stock could take a tumble.
6. Your Own Behaviour
It's human nature to get excited and follow the crowd in feeling good about a stock. The crowd shows its enthusiasm when it bids the price up so high that the P/E ratio tops 20. Learn to resist these feelings.
It;s also human nature to get frightened when everyone is running from the stock market. Get your emotions under control and start to take a look for good buys when everyone else thinks it's time to escape.
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