Sunday, 7 March 2010

Ten ways to improve your investment performance


"You have to pay your dues," is what my friend Fred replies when someone asks him for stock market advice. I know Fred well enough to be able to testify that, when it comes to dues, he has indeed paid his.

Like many others, Fred lost a great part of his investments in the June 2002 market crash. That's when share prices of internet companies collapsed, sinking the rest of the market and keeping it down during the following twelve months.

"For me, the whole mess was a blessing," Fred smiles when he tells me the story for the hundredth time. He knows that I am going to listen attentively to his words, since I belong to those who never get tired of receiving uncomfortable, but invaluable advice.

Why do I love to hear Fred's story? Because he is one of the few persons I know who is going through the 2008-2010 financial crisis without a scratch. What, I must add regretfully, is not my case.

"I was living in an illusion," recounts Fred. "The 2002 stock market crash woke me up. It made me ask myself hard questions about my investment style and objectives."

He tells me that, for him, the most difficult was to admit that many of his cherished ideas about investment were radically false. "I was a great believer in traditional theories and I was wrong," Fred summarizes.

Thanks to Fred, I have come to realize myself that most of my ideas about investment are fairy tales, although pervasive ones. Who could blame me for believing what is daily propagated by so many alleged experts?

"I used to spend lots of time selecting stocks that I intended to keep for the long term," Fred confesses, shaking his head. "I was well aware that market corrections and crashes take place from time to time, but I had learned to see them as inevitable."

After losing 60% of his liquid assets in 2002, Fred threw away his previous theories. Pain had pushed him to change. He was determined to reshape his investment practices and take control of his life. He promised himself that, whatever happened in the future, he would not be paralysed again, he would not be playing sitting duck any more.

"I learned to look at facts with an open mind," Fred explains. "The change of mentality was not easy, since I had been brainwashed to ignore the contradictions in my thinking."

Fred's explanations illustrate how hard was for him to change his mind. "It took me several weeks of thorough self-examination to reach the conclusion that my achieving long-term investment growth had nothing to do with how long I kept stocks in my portfolio."

"The 2002 market crash changed my view of the world," remarks Fred pensively. "It forced me to abandon old myths that didn't work. It put me back on the right track. It made me choose between giving up altogether or acquiring the habits of a professional investor."

Today in 2010, I can see clearly which choice Fred made. He is going through the current financial crisis completely unscathed. While a storm is wiping out investors all over the world, Fred's annoyance from the market is comparable to a ripple in the water.

"If you had to condense all you've learned in ten rules, which ones would you choose?" I asked him, taking notebook and pencil out of my pocket. "Could other investors apply the lessons that were so hard for you to learn?" These were Fred's responses:

1. Develop long-term ambitions and work on their implementation by devoting daily a fixed amount of time to supervising your investments.

2. The major difference between professional and amateur investors is that professionals are always willing to recognize their mistakes. If facts turn against your theories, drop the theories. Be ready to sell your shares when it becomes obvious that you have made a mistake.

3. In stock market investments, like in real estate, the easiest profits are made by purchasing attractive assets at a low price.

4. You don't need to spend hours on end doing research in order to achieve high investment returns. The cost of a few superb investment newsletters is negligible compared with the time you'll save.

5. The cheapest way to avoid catastrophic losses in the stock market is to place stop-loss orders in every share in your portfolio. It's up to you to decide whether you are ready to take a loss of 10% or 20% before recognizing a mistake.

6. Never invest more than 5% of your assets in one single share or venture. Even if you devote all the care in the world to select your investments, you will never be able to rule out all risks.

7. There are dozens of stock markets in the world. If you live in the US or Europe, take a look at Brazil, China, Australia, or New Zealand. The costs of investing internationally are lower than you may think.

8. Dividend-paying shares with a long history of increasing dividends every year are usually solid investments if you can buy them at a reasonable price.

9. Never invest in something that you don't understand. Avoid obscure companies with unidentifiable sales and profits.

10. Use the internet to the maximum. The amount of investment information available for free is mind-boggling. Nevertheless, remain sceptical, compare sources, and check everything several times.

Investment mistakes are no different from others. Marketing failures will allow you to improve your product targeting next time. Human resources blunders should help you hire better candidates in the future.

The validity of the lessons we learn is often commensurate with the pain caused by our mistakes. Mismanaged assets, like mismanaged advertising, may lead to a financial loss, but if the loss teaches you a great lesson for the future, nothing has been wasted.

[Text: http://johnvespasian.blogspot.com]

[Image by Alaskan Dude under Creative Commons Attribution License. See the license terms under http://creativecommons.org/licenses/by/3.0/us]

Ten ways to improve your investment performance


"You have to pay your dues," is what my friend Fred replies when someone asks him for stock market advice. I know Fred well enough to be able to testify that, when it comes to dues, he has indeed paid his.

Like many others, Fred lost a great part of his investments in the June 2002 market crash. That's when share prices of internet companies collapsed, sinking the rest of the market and keeping it down during the following twelve months.

"For me, the whole mess was a blessing," Fred smiles when he tells me the story for the hundredth time. He knows that I am going to listen attentively to his words, since I belong to those who never get tired of receiving uncomfortable, but invaluable advice.

Why do I love to hear Fred's story? Because he is one of the few persons I know who is going through the 2008-2010 financial crisis without a scratch. What, I must add regretfully, is not my case.

"I was living in an illusion," recounts Fred. "The 2002 stock market crash woke me up. It made me ask myself hard questions about my investment style and objectives."

He tells me that, for him, the most difficult was to admit that many of his cherished ideas about investment were radically false. "I was a great believer in traditional theories and I was wrong," Fred summarizes.

Thanks to Fred, I have come to realize myself that most of my ideas about investment are fairy tales, although pervasive ones. Who could blame me for believing what is daily propagated by so many alleged experts?

"I used to spend lots of time selecting stocks that I intended to keep for the long term," Fred confesses, shaking his head. "I was well aware that market corrections and crashes take place from time to time, but I had learned to see them as inevitable."

After losing 60% of his liquid assets in 2002, Fred threw away his previous theories. Pain had pushed him to change. He was determined to reshape his investment practices and take control of his life. He promised himself that, whatever happened in the future, he would not be paralysed again, he would not be playing sitting duck any more.

"I learned to look at facts with an open mind," Fred explains. "The change of mentality was not easy, since I had been brainwashed to ignore the contradictions in my thinking."

Fred's explanations illustrate how hard was for him to change his mind. "It took me several weeks of thorough self-examination to reach the conclusion that my achieving long-term investment growth had nothing to do with how long I kept stocks in my portfolio."

"The 2002 market crash changed my view of the world," remarks Fred pensively. "It forced me to abandon old myths that didn't work. It put me back on the right track. It made me choose between giving up altogether or acquiring the habits of a professional investor."

Today in 2010, I can see clearly which choice Fred made. He is going through the current financial crisis completely unscathed. While a storm is wiping out investors all over the world, Fred's annoyance from the market is comparable to a ripple in the water.

"If you had to condense all you've learned in ten rules, which ones would you choose?" I asked him, taking notebook and pencil out of my pocket. "Could other investors apply the lessons that were so hard for you to learn?" These were Fred's responses:

1. Develop long-term ambitions and work on their implementation by devoting daily a fixed amount of time to supervising your investments.

2. The major difference between professional and amateur investors is that professionals are always willing to recognize their mistakes. If facts turn against your theories, drop the theories. Be ready to sell your shares when it becomes obvious that you have made a mistake.

3. In stock market investments, like in real estate, the easiest profits are made by purchasing attractive assets at a low price.

4. You don't need to spend hours on end doing research in order to achieve high investment returns. The cost of a few superb investment newsletters is negligible compared with the time you'll save.

5. The cheapest way to avoid catastrophic losses in the stock market is to place stop-loss orders in every share in your portfolio. It's up to you to decide whether you are ready to take a loss of 10% or 20% before recognizing a mistake.

6. Never invest more than 5% of your assets in one single share or venture. Even if you devote all the care in the world to select your investments, you will never be able to rule out all risks.

7. There are dozens of stock markets in the world. If you live in the US or Europe, take a look at Brazil, China, Australia, or New Zealand. The costs of investing internationally are lower than you may think.

8. Dividend-paying shares with a long history of increasing dividends every year are usually solid investments if you can buy them at a reasonable price.

9. Never invest in something that you don't understand. Avoid obscure companies with unidentifiable sales and profits.

10. Use the internet to the maximum. The amount of investment information available for free is mind-boggling. Nevertheless, remain sceptical, compare sources, and check everything several times.

Investment mistakes are no different from others. Marketing failures will allow you to improve your product targeting next time. Human resources blunders should help you hire better candidates in the future.

The validity of the lessons we learn is often commensurate with the pain caused by our mistakes. Mismanaged assets, like mismanaged advertising, may lead to a financial loss, but if the loss teaches you a great lesson for the future, nothing has been wasted.

[Text: http://johnvespasian.blogspot.com]

[Image by Alaskan Dude under Creative Commons Attribution License. See the license terms under http://creativecommons.org/licenses/by/3.0/us]