In order to become good in your art and succeed, one needs to keep an open mind, commit to continuous learning, and reflect back to check your tracks and direction. In investing and individual portfolio management, while it is important to understand PE ratios, correlations, book values, etc., it is also equally important to focus of our behavioral characteristics. Discussed below are three characteristics that I have learnt play big role in our investment success.
(1) Need to have well defined strategy
Individual investors who want to manage their own portfolio must have their own strategy. This should include investing style, time period, and diversified asset allocation. In addition, you also need to determine how you are going to manage it. If is based on sound investing principles, you will get good results. The well defined strategy will allow you to keep your emotions out of the picture.
Many of us make a mistake of having vague objectives like making more money, increase capital etc, and end up thinking about selling price. Instead focus on your buy price which is in your control. This way you built-in margin of safety and profits will take care of themselves.
Many professionals will make you believe that keeping cash is not advisable and it loses value. In my view, deciding to keep cash is also a strategy if you know how/when you are going to use it.
(2) Homework before Buying Stock
Too many of us think that looking at balance sheet and crunching few numbers is enough to come to a conclusion about a given stock or company. We believe that’s the homework. Well, if looking at balance sheet was a holy grail, every accountant would be rich. Along with balance sheet, qualitative perspective of the company is also an important piece. I acknowledge the fact that it will take time for me to understand how the company makes money, but at least I know what I am doing. We should understand that it takes time to build a great company; similarly it takes time to make a sustainable winning portfolio.
(3) Daily checking of your portfolio value
I know couple of folks in thirties at my work place, who are supposedly long term investors. But have desktop application open to keep track of their portfolio value. One guy even has iPhone apps and keeps checking it.
We all know markets are volatile and stocks will fluctuate. So why worry about daily changes. This is an addiction that will (I repeat, it will) force you make emotional and irrational decision. You will either buy a stock that you did not want, or you will sell a stock that you didn’t want to sell at first place.
It is easy to understand these characteristics, easy to write it down, and remain happy telling ourselves we have everything in place to succeed. However, remember to execute it. It takes extra effort and hard work, but then who said it is easy to earn money.