The Story of Anne Scheiber: Discipline Trumps Math Ability

April 12, 2007

The Story of Anne Scheiber: Discipline Trumps Math Ability

Consider the remarkable case of Anne Scheiber. She represents not only the superb returns that can be enjoyed from a dedicated and systematic buy and hold strategy, but also the pluck to jump back in the game after losing everything...

She didn't do it with high-flying internet stocks. What's even better, Anne's time-tested investing style is important because it embodies one of three criteria for achieving great results.


It's a simple strategy and can be used by anyone — even small investors.

She relied on patience and sticking with her investment strategy - and above all the discipline to keep adding to her investments on a regular basis and over a long period of time.

On her modest salary as an auditor for the Internal Revenue Service (just over $3000 a year), she managed to invest $5000 over the next ten years. When she died in January 1995 at the age of 101, that modest investment had grown to $20 million. That's not a misprint. $20 million!

Her secret?


Miss Scheiber invested in stocks of companies that she knew and understood. Companies whose products she used. She loved the movies. So she invested in the production companies like Columbia pictures. She drank Coke and Pepsi and bought shares in both. She invested in the companies that made medications she took - Schering Plough and Bristol Myers Squibb. And so on.

Once can achieve the same thing by investing in a mutual fund, if you don't know what stocks to pick OR more importantly, if you're just starting your portfolio and you need diversification to blot out risk. (See: All Risk is Not Created Equal)


She invested regularly and with discipline -- making it the first priority BEFORE she had the latest Manolo's, Prada or Gucci -- through thick and thin for over forty years. Through the bear market of 1973-1974. Through the crash of 1987.


She invested in herself first so later she could have any designer she wanted!

Don't be misled or confused about the need for intricate trading strategies, greater math ability, or get rich quick 'secrets'. (There are none!)

It's about a conscious choice you're going to make today that says: "I can do this; I can own the responsibility for my financial future; and I can do it without pain. I can start right where I am today and still make an impact!"

Discipline -- a dedicated and systematic investment approach -- trumps sophisticated market knowledge. Combined with Diversification and a Longer-Term holding period, you have the only formula you need for success in investing.

Remember, the Tortoise and the Hare fable -- Slow and steady wins the race!


http://the411.typepad.com/weblog/2007/04/the_story_of_an.html

The benefits of having an investment philosophy and strategy

The benefits of having a strategy to support your investing are:
- the removal of subjectivity
- consistency in your investment decisions
- the ability to repeat your successes and avoid repeating your mistakes.

A strategy is simply a set of rules or guidelines that are adopted consistently over time.  Having a strategy does not prevent you from having losses though.  By documenting your approach to investing you can help remove the emotive element to making a decision by ensuring that you have developed a solid argument to support your investment decision.  Another advantage of having documented your approach to decision making means that your have a record of how you achieved your successful results to help you repeat them.

****Desired Characteristics for Potential Investment (Investment Philosophy of Magellan Infrastructure Fund)

Magellan Infrastructure Fund - Investment Philosophy


The Magellan Funds have two principal Investment Objectives:

• to minimise the risk of permanent capital loss; and
• to achieve superior risk adjusted investment returns over the medium to long-term.

Our Investment Philosophy is simple to state. We aim to find outstanding companies at attractive prices. We consider outstanding companies to be those that have sustainable competitive advantages which translate into returns on capital materially in excess of their cost of capital for a sustained period of time. While we are extremely focused on fundamental business value, we are not typical value investors. Securities that appear undervalued on the basis of a low price to earnings multiple or a price to book multiple will often prove to be poor investments if the underlying business is fundamentally weak and exhibits poor returns on capital. We will buy companies that have both low and higher price to earnings and price to book multiples provided that the business is outstanding and the shares are trading at an appropriate discount to our assessment of intrinsic value.

An outstanding company will usually have some or (ideally) all of the following characteristics:

WIDE ECONOMIC MOAT
An economic moat refers to the protection around an economic franchise which enables a company to earn returns materially in excess of the cost of capital for a sustained period of time.

Outstanding companies are unusual as capitalism is very efficient at competing away excess returns, in most cases. A company’s economic moat will usually be a function of some form of sustainable competitive advantage.

A strong indicator as to whether a company possesses an economic moat is the historical returns on capital (both including and excluding intangible assets) it has achieved. If a company has earned returns materially above the cost of its capital for a sustained period, it is a good indication that a company may have an economic moat. In some cases, a company may be developing a strong economic moat, but its historical returns on capital are low reflecting the investment in building a business with long-term sustainable competitive advantages. The key lesson is that historical returns on capital do not necessarily indicate whether a business has a wide economic moat and it is critical to fully understand the competitive advantages and threats which protect and threaten a company’s economic franchise.

Identification of companies with wide economic moats involves consideration and assessment of the barriers to entry, the risks of substitutes, the negotiating power of buyers and suppliers to a company and intensity of rivalry amongst competitors.

The following are illustrations of sustained competitive advantages:

• Where it is very expensive for consumers to shift from the incumbent provider (that is, where there is a low threat of substitutes) because of, for example, cost, inconvenience and/or regulatory restrictions.
• Where the leading market participant has material economies of scale which gives it a significant cost advantage over competitors or new entrants.
• Where the business has a strong and unique brand name or is protected by long-term intellectual property rights such as copyright, patents, trademarks and/or regulatory approvals.
• Where a company has a very strong network (ideally monopoly or proprietary). For example, where it is the vital intermediary between buyers and sellers, a market maker or even a ring road that tolls workers and businesses use as they move people and goods. We are particularly interested in networks where access, pricing and volume are subject to market forces and are not regulated in a materially adverse manner.
• Where the use of psychological imperatives (such as, safety, exclusivity and quality) drives customer loyalty and enables companies to charge a premium for their products or services.

Each of these sustained competitive advantages is relatively unusual and it is particularly valuable where a strong competitive advantage prevails over a long period of time. Market-based monopolies and proprietary networks can provide the strongest and most sustainable competitive advantages, but are extraordinarily rare.

RE-INVESTMENT POTENTIAL
We seek companies that have a moderate to high potential to continue to re-invest capital into the business at high incremental returns.

We believe that conventional investment analysis fails to properly assess the potential of a business to deploy material amounts of additional capital into the business at attractive rates of return. This is a fundamental driver of value over time.

The most attractive types of companies are either:

• Companies with wide economic moats which can continue to grow materially with very limited additional capital.
• These companies will exhibit rising returns on capital employed. These types of businesses are extraordinarily rare and extremely valuable.
• Companies with wide economic moats which have opportunities to deploy material amounts of capital into the business at high incremental rates of return. Examples include a strong retail franchise with substantial roll-out opportunity, or a retail banking or financial services franchise that can continue to grow its lending activities at attractive margins.

These types of businesses are rare and can be very valuable compounding machines. It is more usual to find businesses with wide economic moats which can only deploy very modest amounts of capital and exhibit modest growth potential. These businesses, while attractive, are less likely to be compounding machines than those with material high return re-investment opportunities.

We are therefore very focused on assessing a company’s ability to continue to re-invest free cash flow at high rates of return. It is factors such as, store roll out potential, global expansion potential, the size of the market and market share potential, and market growth rates, which will drive this re-investment potential.

We judge re-investment potential as low, medium or high depending on the level of re-investment over the medium term as a percentage of net income, and the rate of return expected to be achieved.

LOW BUSINESS RISKS
The purpose of assessing business risk is to determine the predictability of cash flow and earnings projections. Businesses which are difficult to predict or could exhibit large variations in cash flows and earnings have high inherent business risk.

We assess business risk taking into account factors such as cyclicality, operating leverage, operating margin, financial leverage, competitive strength, regulatory and political environment and profitability.

We assign each company a risk assessment: low, medium and high. This is not an attempt to measure the volatility of the shares, but rather the predictability and strength of the underlying business.

LOW AGENCY RISK
We term the risk surrounding the deployment of the free cash flow generated by a business as €˜agency risk’.

A fundamental assumption inherent in a standard discounted cash flow valuation (DCF) is that free cash flows are returned to shareholders or are re-invested at the cost of capital. The reality is that this assumption is often flawed as free cash flow is often not returned to shareholders but, rather, cash is re-invested by companies at returns below the cost of capital. In these cases, businesses can end up being worth substantially less than implied by a DCF analysis. We term the risk surrounding the deployment of the free cash flow generated by a business as agency risk.

A company which can deploy a substantial amount of free cash flow back into the business at attractive returns for a sustained period of time will almost certainly carry lower agency risk than a company which has limited opportunities to re-invest capital at attractive returns, unless the company is explicit about returning excess cash flow to shareholders via dividends and/or share buy-backs.

In assessing agency risk, we look at factors, including the structure and level of incentives offered to senior management, the level of share ownership by senior management and directors, the track record of management in pursuing acquisitions, the desire of management to grow their empire and the track record of management and the Board in acting in a shareholder friendly manner, including returning free cash flow to shareholders via share buy-backs and/or dividends.

The assessment criteria we apply in evaluating potential investments are depicted in the diagram here.



An ideal investment will normally have a number of combined favourable attributes operating together which would illustrate what Charlie Munger of Berkshire Hathaway describes as a Lollapalooza effect (which is a term for factors which will reinforce and greatly amplify each other).

MARGIN OF SAFETY
We will only purchase an investment when there is a sufficient margin of safety. The margin of safety is the discount we require before buying shares of a company. The bigger the assessed discount, the wider is our margin of safety.

The available margin of safety, we believe, is driven, in part, by prevailing market psychology. While not a driver of a company’s quality or intrinsic value, the markets can have a profound, albeit rarely long-term, effect on the pricing of a company’s shares. When short-term issues or concerns are worrying investors or other factors are resulting in excess enthusiasm (that is, irrational exuberance), shares will often be mis-priced relative to intrinsic value. While our process can make us appear to be out of step with trends, investing contrary to consensus thinking has the potential to provide investment opportunities. Understanding where current market sentiment lies and assessing the company within the context of whether the concern or excitement is being appropriately priced, is an important step in investing.

There are some exceptional businesses where the Lollapalooza effect is truly at work and the moat is so wide and the risks are so low that we will invest with a very modest margin of safety. It is more usual to find companies which do not have all the reinforcing factors at play which results in a higher level of risk and requires a higher margin of safety.

How Has Your Investment Process Developed?

How Has Your Investment Process Developed?

By Tim Du Toit

I do not know about you, but as time goes by I appreciate the works of remarkable people, in any field, more and more.

It allows me to start any subject not as a complete beginner, but as someone with a good or even great fundamental knowledge of any subject by reading a few books.

A major part, practical experience, is still missing, but just imagine what we would have to go through if we did not have access to the knowledge at all.

Anything we would start would be from absolutely nothing.

A good example of learning from others would be the development of my investment process.

Here is a short summary of the main developments:

• I started out with a basic correspondence course on the stock market in 198
• I lost money I pooled with my father using technical analysis
• I listened to brokers and lost more money chasing the hottest stocks while trading a lot
• I discovered a book Winning on the JSE by the mathematician Karl Posel that gave me a framework for finding, evaluating, buying and selling undervalued investments.
• From there I went on to read Warren Buffett, Benjamin Graham, David Dreman and many more.

My investment process thus moved from a process with no proven evidence of success to one that has substantial proven success with the help of other successful investors. All of this through reading and doing.

Over time my investment process has moved from the use of a few basic financial ratios to check-lists.

Until recently my favourite valuation metrics were:

• Price to earnings ratio ("PE") the lower the better
• Price to book ration ("PB") also the lower the better and
• Debt to equity where I prefer companies with less than 35%

That however changed when, about two years ago, I read a book by Joel Greenblatt called The Little Book that Beats the Market.

The book suggests the use of two ratios,

• one to identify good companies that earn high returns on assets and 
• a second ratio to identify cheap or undervalued companies.

Since reading the book these two ratios have become the main valuation metrics I use.

To identify good companies

Ratio 1

= EBIT / (Working Capital + net fixed assets + short term debt)

The higher this ratio the better. Higher means the company earns a high return on its total assets, fixed assets as well as working capital.

Where:

EBIT = Earnings before interest and taxes

Working capital = Current assets - current liabilities

Net fixed assets = Total fixed assets - depreciation (Excludes goodwill and other intangible assets)

To Identify undervalued companies

Ratio 2

= EBIT / Enterprise Value

As with the first ratio a higher value here is also better. Higher means you are paying less for the company in relation to the profit it generates.

Enterprise value is calculated as follows

= market capitalisation (number of shares * current share price) + debt - cash

Enterprise value thus expresses the value of the company to you as a private buyer of the whole company.

Firstly you pay for the market capitalisation plus the debt, which you have to repay, minus any available cash you can use to reduce the company's debt or pay out to yourself to lower the purchase price.

The added advantage of using Enterprise Value is that it already incorporates the debt and cash the company has on its balance sheet. So you do not separately have to evaluate the amount of debt the company carries.

What are your favourite valuation metrics? Let me know in a short note on the contact page on my website.

Go here for an investment checklist example.

Tim du Toit is the editor and founder of Eurosharelab. He has more than 20 year of institutional and personal investing experience in emerging and developed markets. Tim is based in Hamburg, Germany. More of his articles can be found at http://www.eurosharelab.com. Article Source: http://EzineArticles.com/?expert=Tim_Du_Toit

Buying Bargain Stocks (The tenet of Value Investing)

The activities the enterprising investor in the stock market may be classified under 4 areas:

1. Buying in low markets and selling in high markets (Beware that this is Market timing)
2. Buying carefully chosen "growth stocks" (Learn the Paradox of Growth Stocks)

3. Buying bargain stocks (The tenet of value investing)

4. Buying into "special situations" (Only a few will benefit)


From Chapter VI of the Intelligent Investor, to obtain better than average investment results over a long pull, the investor requires a policy of selection or operation that have 2 characteristics:

* it must meet objective or rational tests of underlying soundness (that should prove both conservative and promising); and
* it must be different from the policy followed by most investors or speculators.

Three investment approaches meet these criteria. They differ rather widely from one another, and each may require a different type of knowledge and temperament on the part of those who apply it.

1. Bargain in the Relatively Unpopular Large Company
- concentrating on the larger companies that are going through a period of unpopularity.  Their cheapness are evidently the reflection of relative unpopularity with investors or traders.

2. Purchase of Bargain Issues
- a bargain issue is one which, on the basis of facts established by analysis, appears to be worth considerably more than it is selling for. To make a point, an assumption maybe that an issue is not a true "bargain" unless the indicated value is at least 50% more than the price. This may occur during two circumstances:

* (a) currently disappointing results, and
* (b) protracted neglect or unpopularity.

3. Bargains in Secondary Stocks
- a secondary company is one that is not a leader in a fairly important industry. Due to pronounced preference for industry leaders and a corresponding lack of interest most of the time in the ordinary company of secondary importance, meant the latter group have usually sold at much lower prices in relation to earnings and assets than have the former. It has meant further that in many instances the price has fallen so low as to establish the issue in the bargain class.

Aim for durable, long-term outperformance in your stock market investing

Long term investors in the stock market will know that most go through hot and cold streaks.

 

More importantly, investors should aim for durable, long-term outperformance.

 

However, many investors either

• lose in equity investment or
• end up in a no profit-no loss situation.

 

Often, it happens that you start putting money in equities and the market moves to new highs. Then you are tempted to put in more money, since you are getting higher returns. Suddenly, the market starts to slide down.

Forget returns on investment, you are not even able to recover your capital. This is a common grouse of most investors.

 

Why? Is it because you make wrong decision or because the market is only meant for speculators and gamblers?

 

No, that’s not true. We go through this pain again and again because we do not learn from our previous experiences in the market.

 

Only the ‘smart investors’ survive the ups and downs in the market and make pots of money.

Investing requires continuous learning from the market.

Lessons to learn from markets

Ashish Pai / New Delhi January 31, 2010, 0:19 IST

There is money to be made. But remember the basics.

Also Read

- Simple strategies for small investors
- The top 10 business bestsellers
- Be curious about companies
- News you should not use
- Time your stock sale
- The momentum psychology


The best way to learn your investment lesson is by investing in equities. Each occasion in the market teaches new lessons, which will empower you to achieve your ultimate goal of building wealth.

Often, it happens that you start putting money in equities and the market moves to new highs. Then you are tempted to put in more money, since you are getting higher returns. Suddenly, the market starts to slide down. Forget returns on investment, you are not even able to recover your capital. This is a common grouse of most investors. They either lose in equity investment or end up in a no profit-no loss situation. Why? Is it because you make wrong decision or because the market is only meant for speculators and gamblers?

No, that’s not true. We go through this pain again and again because we do not learn from our previous experiences in the market. Only the ‘smart investors’ survive the ups and downs in the market and make pots of money. Here are some lessons required to be learnt from the market.

Evaluate when you lose money in the market. Do not just shrug and say, “I am not going to invest any more!”. Investing does not mean making no mistakes, it means learning from experience. All of us made mistakes, when we started - such as going by tips from broker or buying penny stocks. As time passed by, we learnt that by not following the herd, we may have limited gains but our capital will be protected.

Be patient when investing in the market. Investors who show the right kind of patience make the most from the stocks they invest in.

• You need to be patient by not booking losses at the slightest market provocation or
• by not selling stocks before they have reached an optimum price.
• Also, be patient by not panicking when in a market downslide or
• by not buying stocks which you know are good but currently priced higher.

Look for opportunities to invest. There will be many opportunities to grab in the market, such as

• FII selling,
• global downturn,
• credit crisis,
• currency crisis, etc.

Each such occasion is to be looked at as an opportunity. ‘Smart investors’ will fill their pockets with the crème de la crème stocks in the equity market on such occassions. For example, blue-chip stocks like BHEL, HDFC, NTPC and ITC were quoting low prices in the first quarter of last calendar year due to the global credit crisis. It was an opportunity to buy these stocks.

Look for quality advice before investing. Do not follow the herd mentality. Always remember, quality stock picking will help you generate substantial wealth over a period of time. The quality picks can be large-cap, such as SBI, HDFC Bank and Tata Power or mid-caps such as Petronet LNG, Power Grid and Marico.

Learn to invest systematically. Getting into a systematic investment plan (SIP) in mutual funds or directly in an equity portfolio is the preferred mode of investing. At the end of five to 10 years, this portfolio is likely to appreciate by leaps and bounds. If the market is in a bullish phase, the money may even double in less than three years.

Learn the importance of diversification. You can better your returns and reduce risks by diversifying your portfolio. You can diversify across asset classes like gold, commodity futures, property, etc, as well.

A profit booking policy is advisable. The profit booking policy can be based on expectations from equities. Suppose an investor has put money in a stock and it rises by 100 per cent in a year, he may book profits either partially or fully. One strategy could be to book profits in a way that the initial investment is recovered and the profit portion continues to be invested in the stock.

Assess risks before investing in the market. Many a time, we invest in a particular stock or fund without assessing the risks involved with the stock. For example, sectors such as real estate or metals are riskier as compared to FMCG or power. If you don’t have a high risk taking ability, do not go for risky stocks or sectors.

Do not borrow to invest. In a sliding market, such investors are most impacted, as they have to offload stocks due to margin calls or liquidity issues.

Do not chase momentum stocks. In most cases, investors enter such stocks at the peak and are stuck with these for a long period or have to sell at a loss. Some of the momentum stocks in the recent past were Unitech, DLF, Jet Airways, Reliance Industrial Infrastructure and Jai Corp. The prices of such stocks reach a peak on sustained buying and then slide, roller-coaster, in a few sessions.

Conclusion :
Investing requires continuous learning from the market. Like driving a car, investment is more of learning practically and hands on. It requires discipline. When you are driving a car, what speed to drive and which lane to drive in are decided by the driver. Similarly, in case of investment, you must know how much to invest, where to do so and when to sell.

The best is to have a disciplined approach, combined with an investment philosophy. Some of the great investors like Warren Buffet or George Soros have been successful as they have a disciplined way of investing. There is no easy way to make money. All of us have to learn lessons in investing in the same market and in the same way. Each time, investors are put to different tests. Only the learned investors will succeed. Be a ‘smart’ investor.

In brief :
* Learn from your past experience
* Have a strategy to invest
* Iinvest systematically
* Look at your liquidity requirements
* Diversification is advisable
* You will need discipline and patience

The writer is a freelancer


http://www.business-standard.com/india/news/lessons-to-learnmarkets/384131/

****Investment Philosophy and Strategies Notes

Investment Philosophy and Strategies
http://www.docstoc.com/docs/7984050/Investment-Strategies

Portfolio Management Theory And Technical Analysis
Lecture Notes
http://samvak.tripod.com/portfolio.html

Conventional Wisdom

Conventional Wisdom

The investor should be able to make up lists of bonds and preferred stocks meeting the rigorous requirements of stable income investment.

The investor should reject many stocks which sell at full prices but which do not pass his test of safety. These stocks are frequently bought nonetheless by investors who have confidence in the business and are attracted by their higher-than-standard dividend yields. There are logical objections to such stocks.

How to select the most attractive stock at their current prices?

How to recommend "those which are likely to perform best in the future"?

By intensive study of the various industries and their prospects, and by close familiarity with individual companies and their managements, an investor can undoubtedly reach conclusions of value. To a great extent these are the results of the application not of formal standards to a set of facts and figures, but rather of business judgment and foresight to an intimate knowledge of conditions in the industry and its companies.

One cannot be taught how to weigh the future. In fact, the emphasis should be placed in the opposite direction. The investor should not trust his projections of the future too far, and especially not to lose sight of the price of the security he is analysing. No matter how rosy the prospects, the price may still be too high.

Conversely, the shares of companies with unpromising outlooks may sell so low that they offer excellent opportunities to the shrewd buyer. Also, the wheel of time brings many changes and reversals. "Many shall be restored that now are fallen, and many shall Fall that now are in honor."

Advice for investor

The investor should select a group of good quality company stocks that are fairly priced suitable to the investor's financial and temperamental requirements.

1. The investor should keep away from buying inferior stocks during periods of enthusiasm and high prices.

2. Next, the investor should be encouraged to buy the selected stocks when the market level is below, rather than above, its indicated long-term normal figure.

3. Finally, the investor should always consciously avoid paying extremely high prices for good stocks.

The Thought Process Is What Counts

The Thought Process Is What Counts

In value investing, it really is the thought that counts. The thought process is important. This is how you think about your investments and investment decisions. Analysis doesn't decide for you; it only serves to support the thinking behind the choices you make.

There are many analytical blocks and approaches to appraising company value and many ways to decide whether the price paid for that value is right. These are evident in the postings in this blog. However, it is repeatedly obvious that no single method works all the time, and if one did, everyone would make the same findings and buy the same companies and values would no longer be values. Every article, every book, every value investor has a unique application of the vlaue investing thought process.

The thought process is the intellectual process - the philosophy - that the value investor internalizes. The tools are there to help, and different tools will help more at different times. If you strive to understand the business value underlying the price before you buy, investing history will be on your side. As you get good at understanding value and price, your investment decisions and performance will only improve.

In the real, practical world of value investing, value comes in many forms. There is so much detail on any given company (much of which you can't know) that it often isn't realistic to become a walking encyclopedia on a company or its fundamentals. And formulas and ratios, although they work and can help, hardly can deliver absolute answers. Usually, taking a few shortcuts makes sense, reserving the deepest analysis to the most critical, difficult and largest investing decisions.

As a practical matter, the so-called Pareto principle, also called the 80-20 rule, applies to investing as it does in much of business: 80 percent of the picture comes from 20 percent of the questions you may ask or facts you may collect about a business. If you focus on most critical aspects of a given business, you'll get most of the picture, without digging up 100 percent of everything about it. If this weren't the case, you'd spend six months analyzing each investment.

You can't spend days on each company and you can't analyze all companies in the investing universe. A simplified, practical approach will help the new value investor get started, and will also help experienced value investors improve their game. You'll undoubtedly find yourself adding plays to your value investing playbook as you gain experience. And you'll also get better at finding that 20 percent that's really important.


Famed fund manager Peter Lynch, in his famous book, One Up on Wall Street, shared this wisdom: "Once you're able to tell the story of a stock to your family, your friends or the dog, and so that even a child could understand it, then you have a proper grasp of the situation."

Key habits of successful investors

Key habits of successful investors
Published: 2009/03/04

Four key habits an investor might want to adopt are:

1. Preserve capital and minimise risk taking;
2. do homework before investing;
3. have an investment philosophy and system; and,
4. be patient.

IT IS a fact that the local market condition is very hard to predict since it is affected by both global and local factors. As an investor, it may not be possible to predict what is going to happen next, but there are certainly ways to learn from people who have succeeded in riding the waves of good and bad times throughout the years.

In the book "The Winning Investment Habits of Warren Buffett & George Soros", Mark Tier listed out 23 winning habits based on the habits of these two of the world's richest and most successful investors. Summarised below, are four main key habits that you might want to adopt as the fundamentals to successful investing.

Successful investor habit 1: Preserve your capital and minimise risk taking

All successful investors preserve their capital as a foundation and they do this through risk minimisation. Most investors have the perception that in order to make profits in the market, there is a need to take high risks and it is right to say that risk and return come hand in hand.

However, in order to ensure a long-term success, you should not just simply take any risks, but only calculated risks. This requires you to analyse the situation thoroughly as to be confident that the chances of having a good result on your side is high.

With that in mind, you would only end up investing in what Warren Buffett calls "high probability events", where the risk of loss is at the lowest and you are almost certain to make money. Always remember Warren Buffett's 'Investing Rules: "Rule No. 1: Never Lose Money! Rule No. 2: Never Forget Rule No. 1"

Successful investor habit 2: Do your homework before you invest

There are nearly one thousand companies listed in our stock market. Which one should you invest in? Having Habit No.1 as the foundation, you will know that the safest companies to invest in should be companies or industries that you are most familiar with, as you can only make good judgments if you have in-depth knowledge and understanding.

This means that you will have to do your own homework and research through all available sources, such as company annual reports, industry reports or public announcements, in order to obtain the facts on the industry, the company of your interest and its competitors.

This is necessary to ensure that you can draw good conclusions on the company's performance and future prospects. Therefore, time and hard work are the two essential elements in turning yourself into an informed and knowledgeable investor. In practicing this, you will also need to be selective and focused on certain industries in which you the have most interest and experience.

Successful investor habit 3: Have your own investment philosophy and system

What is an investment philosophy? An investment philosophy is a set of beliefs that you use as the foundation in developing your personal investment system for buying and selling investments. This will make sure you are fully aware of the reasons behind every investment decision you make. As a beginner in the investing world, you could probably start by following the investment philosophies and systems of some of the great investors that come closest to your heart.

However, along the way, you should tailor your investment system to suit your personality, goals and unique circumstances so that you can practice this entire system without stress and worries.

If you have the discipline to practice the right system religiously, you will not be easily influenced by the voices or rumours in the market and will not be tempted to simply follow the crowd. Hence, the chances of your making the wrong decisions will be minimised.

Successful investor habit 4: Be patient!


There is a Spanish proverb that says "The secret of patience is doing something else in the meantime". If you somehow managed to inculcate the above 3 habits, you will know exactly what you are looking for and as such, will be well equipped with the patience to wait for the right moment to buy or sell your stocks. Both Buffett and Soros stressed the fact that the secret of their success is having the patience to wait. Use your free time to explore and strategise other new opportunities as there are so many companies listed in the market. Always remember that identifying the right candidates does require time and patience.


On a last note, try to adopt the above habits now! Remember, good strategies will only be successful when executed with the right mindset!


This article was written by Securities Industry Development Corporation (SIDC) to educate investors on smart investing. The information provided in this article is for educational purposes only and should not be used as a substitute for legal or other professional advice.


SIDC, the leading capital markets education, training and information resource provider in Asean, is the training and development arm of the Securities Commission, Malaysia. It was established in 1994 and incorporated in 2007.

http://www.btimes.com.my/Current_News/BTIMES/articles/SIDC5/Article/index_html

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