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Many of my investment strategies are derived from fundamental investing and value investing. I use strategies similar to Warren Buffett’s, not just because he’s a well-known investor, but because they make the most sense to me.
This is the key to successful equity investing. Don’t listen to someone just because you think they have more stock investing experience than you. Instead, try to do your own thought and analysis and read more before deciding which strategy will work best for you. Once you have developed your own investment philosophy, stick with it and only trust yourself.
My investment philosophy
1. Don’t lose money.
As many people already know, Warren Buffett humorously set out his two rules for investing in stocks, where rule number 1 is “Never Lose Money” while Rule number 2 is “Forget Rule number 1”.
Preserving capital is important because a stock that has lost half its value must double in value before you can go back to where you started. Because of this, you need to be extremely careful when choosing stocks and that brings us to rule number 2.
2. Have a margin of safety
The margin of safety, in simple terms, is a buffer that you place between what you perceive to be the value of the stock and its price. If you value a stock at $ 1 and only buy it when its price is 50 cents, your margin of safety is 50 percent.
Deciding how much margin of safety to put on a stock varies for companies in different industries and is another topic in itself.
In summary, a margin of safety is required to protect your capital in the event that you were mistaken in your initial assessment of a stock pick. That way, even if you were wrong, you would have bought the stock at a much lower price than if you hadn’t taken into account a margin of safety.
3. Invest for the long term
There is no way to time the market, but a lot of people seem to think differently. They buy when the stock falls easily and hopes they can sell it for a profit in the near future. These people usually follow a “hit-and-run” strategy in which they are content with making a few hundred dollars every time they make a trade. They also have a cut-loss strategy where they exit the market if the price falls below a certain amount within days of buying the stock.
The truth about the stock market is that real money is made in a few days. If you get in and out of the market frequently, there is a chance that during the few days of a real price rally you will not be in the market and thus miss out on profits.
If you invest long-term, you also save commissions to the broker, capital gains taxes and put the compounding power into play. The difference between trading in the market and buying in the long run is significant and shouldn’t be ignored.
4. Know when to sell and when not to sell
Even if I advocate investing for the long term, that doesn’t mean that I will hold on to my investments forever. When I rate a stock, I already have in mind how much the stock is worth and therefore already have an exit price in mind. The purpose of value investing is to buy this stock at a significant discount from its value.
However, there may be times when the market is euphoric and the price of the stock rises well above my value. At this point, I’ll be re-evaluating the company to see if I’ve left out any important news or factors that could be responsible for the price hike. If my view of the company remains the same, I’ll sell the stock because there’s no reason not to take advantage of the madness of the market.
It is important not to be greedy at this point and keep increasing the exit price you set. Have an exit price and stick to it.
The reverse is also true. Most people panic and sell when the price drops and that doesn’t make any sense. If a stock’s price falls, check the fundamentals again. If nothing has changed, your appreciation should be the same, and that means the stock has an even bigger discount than what you bought at before. If so, take the opportunity to buy more of this stock.
5. Have cash with you when there are no good stocks to buy
There are many reasons to hold onto cash when there aren’t any good stocks to buy. Many people find it difficult to do that. The moment they have some cash in hand they want to buy some stocks because if they don’t they feel like they are not in the market and therefore not “investing”.
If you have cash with you, you can also benefit from sudden price declines due to some market fluctuations that are not due to a change in company fundamentals. In these cases, consider reducing the average and buying more of that stock. The worst that can happen to you is that on a purchase that offers a bigger discount now than before, you will run out of cash because you will always have to keep all of your money in the market to “feel like you are.” invest”.
Summary
Investing isn’t just about buying stocks. The homework and preparation in identifying the stock to buy are the real key to successful stock picking. Many people spend a lot of time checking the prices of the stocks they have bought several times a day. This time is better spent researching the company and its business. Ultimately, checking the price of a stock several times a day has no impact on the price and fundamentals of the company. But I’m sure a lot of people are to blame for this, as I can see so clearly in my work place where everyone has opened a little window to check stock prices every now and then.