Every stock investor sets out with the goal of trying to beat the market. A few even dare to think that they can become the next Warren Buffett.
Unfortunately, the harsh reality is that few manage to even come close to this goal.
Nevertheless, you can improve your chances of success.
There is no sure-fire strategy to riches, but by studying successful investors, we can pick up a few tips to help improve our chances.
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Have a strategy and stick to it
Arguably the most important trait of great investors is the ability to set out and stick to a clear strategy.
They understand that they cannot achieve this goal if they don’t have a method and the discipline to follow it through.
It doesn’t matter which approach you choose - growth, value, income, deep value, distressed investing, momentum investing or day trading, whichever route you go down, it is key that you stick with the strategy.
Almost all of the world’s most successful investors have all stuck with one strategy throughout the good times and the bad.
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Never stop learning
Research has shown that for anyone to truly become an expert at something, it takes 10,000 hours of practice. The only way to reach this goal is to continually seek out new information.
Investors should never stop learning and they should always seek to improve existing skills. Fear of the stock market is a product of ignorance, lack of knowledge and understanding.
Learning will eliminate these fears.
As Warren Buffett’s partner, Charlie Munger, says: “If you stop learning, the world rushes right by you.”
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Ask what could go wrong, not what could go right
Most people invest with the wrong frame of mind. Indeed, when assessing an investment, most will ask “what’s the upside here?” or “how much can I make?”
Few investors or traders ever give attention to losing, yet losing is part of the game. But in most cases, investors should constantly be asking, “how much can I lose?”
No one plans to fail. But failure should be part of the plan. That way, it will not come as a shock. It will find you prepared.
Invest inside circle of competence
Everyone has their own strengths and weakness. Each investor has a company or sector he understands more than most. It is important that you invest inside your circle of competence.
This circle defines your investment niche; investments you understand, which essentially is your competitive advantage. Circle of competence limits your investment to what you know and prevents you from straying into the risky unknown.
There is no faster way to lose money than investing in something you don’t understand. If you can’t figure out what a company does or how it makes money, it is often best to stay away, no matter how lucrative the opportunity might be.
By viewing the investment world through the lens of his investment criteria, a great investor literally only sees those investments he can understand.
Admit your mistakes
At one point in time, every investor has made a mistake. It is just part of the business. Successful people focus on avoiding mistakes and correcting them the moment they become evident.
Sometimes, success can come from focusing solely on avoiding mistakes. The best way to act on a mistake it to accept it, learn from the mistake and move on.
Charlie Munger says: “There’s no way that you can live an adequate life without many mistakes. In fact, one trick in life is to get so you can handle mistakes. Failure to handle psychological denial is a common way for people to go broke.”
The writer is the author of The Ultimate Framework for Success in Shares. He can be reached on [email protected]