THERE is a certain group of retailers that always seems to incur losses in the stock market. If we look into the reasons behind those losses, you will notice that instead of building up the right investment habits, they get caught up with a lot of bad investment habits.
In his book The Winning Investment Habits of Warren Buffett & George Soros, Mark Tier listed down 23 winning investment habits. Even though we disagree with the author on certain habits, we think there are six critical habits that can help investors make gains from the stock market.
Habit 1: Be risk-averse and preserve your capital
Some retailers have the misconception that being risk-averse in the stock market means making less money. Based on our observation, risk-averse investors are the ones that are able to make some gains despite the recent slump in the stock market.
In fact, risk-taking investors have been suffering huge losses lately. We believe investors need to be risk-averse and try your best to preserve your capital.
Even though investing in the stock market cannot guarantee returns, by being a risk-averse investor, you can still make good gains and have less risk of losing your capital.
According to Warren Buffett, buying good fundamental stocks can give high gains with lower risk. Risk-seeking investors normally get low returns while taking high risk. Hence, an investor that takes higher risk does not necessarily get compensated by higher returns.
Habit 2: Only invest in the business that you understand
A lot of investors do not understand the business of the companies that they invest in. They believe that they do not need to know that much detail as they can make fast money by listening to market rumours.
However, they do not realise that by the time they get the so-called first hand “insider information”, the market has already reacted to it and there is not much upside left to profit from.
Even worse, if after the purchase price goes down, the investors will be forced to either sell at a loss or hold for a longer term. If they understand the business, at least they would not end up buying poor fundamental stocks. The chances of good stocks appreciating in price are definitely higher than for the poorer ones.
Habit 3: Develop your own personal investing system
Some retailers are looking for a foolproof stock investing system that can consistently beat the stock market. They are willing to pay huge amounts of money to acquire that knowledge. We believe every investor should develop his own stock investing system that suits his individual needs and constraints.
All investing systems, whether based on fundamental or technical methods, require high levels of discipline and efforts. Unfortunately, most investors do not like to do homework. They believe there is someone somewhere who can beat the market all the time and all they need to do is to find him.
Hence, they will follow this so-called “guru” in buying stocks but are reluctant to follow his advice to cut losses. As a result, they will end up with a lot of poor fundamental stocks.
Habit 4: Always search for new investment opportunities
Investors need to develop the habit of always seeking new investment opportunities. In Malaysia, sometimes you may need to look at 10 stocks before you find one or two that are suitable for long-term investment.
The best available information on any company is always the annual reports and public announcements. Investors need to spend time analysing the information and then make their own calculation and check whether it is cheap to buy those stocks at the current price.
Habit 5: Have patience to wait for the right time and right stocks to invest
Sometimes, certain investors believe that they have to predict the market’s next move to make big returns. According to investment gurus like Benjamin Graham and Warren Buffett, do not try to time the market, as you will always fail in predicting the next move.
Instead, what the investors really need to know is the value and the stock price of a company, rather than trying to predict market movement. Investors need to have the patience to wait for the right time and right stocks to invest.
As long as the stock price is selling far below the intrinsic value of the stock, you may consider buying those stocks even though the market may still be on the downtrend.
Habit 6: Able to hold on good fundamental stocks for long term
We believe all investors should own a portfolio of stocks that they will hold for the long term. As long as the businesses have the potential to grow and the companies are paying good dividends, investors need to develop the habit of holding the stocks for a longer term.
They should not be tempted to sell those stocks even if they may sometimes be trading at higher prices.
Extract from Ooi Kok Hwa
