Long-term equity investments can have a significant, positive impact on your net worth – if done correctly. If you dabble in stocks, without any framework or training, you’ll most likely transfer your money to the traders who prey on unprepared investors.
You can do a lot worse than use these rules as a basis to get started. As you gain experience, you can modify them or add to them to suit your personal situation.
NEVER BUY A STOCK FROM A SALESPERSON, ADVISOR OR ANALYST
Even an advisor with fiduciary responsibility has biases. And, often they’re acting on emotions or with a pack mentality. If you refuse to listen to sales pitches and spend your time seeking out your own investment opportunities, your choices and actions will, most likely, further in your own best interests.
The officers of corporations are employees of the company and their compensation is often tied to the stock’s increase in value so you should consider them salespeople too. You must do your own, independent research and base your decisions on the company’s, industry’s and economy’s long-term trends.
Do your own research and Due Diligence into the company, the sector and the economic climate in a systematic manner. One reason stocks in United States based corporations are considered safe for the general public to own are the reporting and oversight the Federal agencies require.
Start your research with the quarterly and annual reports they file with the Securities and Exchange Commission (SEC). Move on to the vetted accounting records: Balance Sheet, Income, and Profit and Loss Statements (pay particular attention to footnoted items and changes from year-to-year).
Assess how the business under consideration fits into the broad economic trends and your portfolio. Develop your own projections (high/low/average) for the stock’s growth and include anticipated dividends in your expected returns. If you don’t know how to calculate a stock’s value or growth rate, educate yourself by reading some of the classics (see my investment book reviews by clicking here) or take a class at your local college.
DO NOT CHECK DAILY PRICES OR TRADE DURING OPEN MARKET TIMES
The equity markets are a seething caldron of groupthink and emotions. The two most common and destructive for investors: Fear and Greed, run rampant. The Wall Street Media channels these for entertainment purposes. Turn off the daytime television/internet and read business and economic news with a skeptical attitude.
Only in the longer term is the true value of a company reflected in the price of their publicly traded stock. Even Initial Public Offerings (IPOs) are now just a method for the early private investors to cash out at the public’s expense.
There’s no need to place market orders during active trading hours. Almost every brokerage offers limit orders that can be entered at any time (if yours does not, you should change brokers) for no additional fee.
CREATE AND MAINTAIN WRITTEN INVESTING PLANS AND CHECKLISTS
It’s just too easy to “change your mind” when your plan is all in your head. You need a written long-term portfolio plan and a projection/plan for each of your holdings. In addition, you need a trading journal tracking your buy and sell decisions, your reasons for making trades and the outcomes. Reviewing this log prior to placing new trades can save you from repetitive mistakes.
You can use online models to compare your portfolio to averages but don’t assume your specific holdings will mirror broad market averages. The reason we spend time and energy picking and choosing individual stocks is to gain a competitive advantage over the averages.
If all this sounds like too much time and effort for you, then don’t invest in individual stocks. Put your money in the Mutual or Exchange traded funds that track the broad market or particular sectors.