Saturday, July 23, 2016

Become Your Own Stock Analyst

Courtesy : Investopedia 

Nobody asks you to become your own doctor or your own lawyer, so why should anybody ask you to become your own stock analyst? Some people like to take up cooking simply because they enjoy doing it. Similarly, there are people like Warren Buffett who enjoy the process of making investments. Therefore, if you are an investor who likes to be self-reliant, then you should consider becoming your own stock analyst. With a big question mark hanging over analysts' credibility, it is always better to learn the ropes. Read on to find out how you too can think like an analyst, even while sitting at home.

 Analysis Is a Process

It doesn't matter whether you are an investor looking for growth or value; the first step in thinking like an analyst is to develop a probing mind. You need to find out what to buy or sell at what price. Analysts usually focus on one particular industry or a sector. Within that particular sector, they focus on select companies. An analyst's aim is to deeply probe the affairs of the companies on their list. They do this by analyzing the financial statements and all other available information about the company. To cross-check the facts, analysts also probe the affairs of a company's suppliers, customers and competitors. Some analysts also visit the company and interact with its management in order to gain a firsthand understanding of the workings of the company. Gradually, professional analysts connect all the dots to get the full picture.
Before making any investment, you should do your own research. It is always better to research several stocks in the same industry so that you have a comparative analysis. However, the biggest constraint in doing your own research is time. Retail investors who have many other things to do may not be able to devote as much time as professional security analysts. However, you can surely take up just one or two firms in the beginning, to test how well you can analyze them. That would help you in understanding the process. With more experience and time, you can think of putting more stocks under your lens. 

The Best Place to Start Is Where You Are

Analyzing the analysts' reports is the best way to start your own analysis. That way, you save a lot of time in cutting short preliminary work. You can learn about your selected company simply by reading analysts' research reports. You may not blindly follow analysts' sell or buy recommendations, but you can read their research reports to get a quick overview of the company, including its strengths and weaknesses, main competitors, industry outlook and future prospects. Analysts' reports are loaded with information, and reading reports by different analysts simultaneously would help you in identifying the common thread. Opinions may differ, but basic facts in all reports are common.
Furthermore, you can take a closer look at the earnings forecasts of different analysts, which ultimately determine their buy or sell recommendations. Different analysts may set different target prices for the same stock. Always look for the reasons while reading analysts' reports. What would have been your opinion about the present stock, given the same information? No clue? Then move on to the next step.
 What to Analyze

For reaching your own conclusion, you need to understand the various steps involved in a stock analysis. Some analysts follow a top-down strategy, starting with an industry and then locating a winning company, while others follow a bottom-up approach, starting with a particular company and then learning about the outlook of industry. You can make your own order, but the entire process must flow smoothly. Any process of analyzing a stock would involve the following steps.

 Industry Analysis

There are publically available sources of information for almost any industry. Often, the annual report of a company itself gives a good enough overview of the industry, along with its future growth outlook. Annual reports also tell us about the major and minor competitors in a particular industry. Simultaneously reading the annual reports of two or three companies should give a clearer picture. You can also subscribe to trade magazines and websites that cater to a particular industry for monitoring the latest industry happenings.

 Business Model Analysis 

You should focus on a company's strength and weaknesses. There can be a strong company in a weak industry and a weak company in a strong industry. The strengths of a company are often reflected in things such as its unique brand identity, products, customers and suppliers. You can learn about a company's business model from its annual report, trade magazines and websites. 

 Financial Strength

Whether you like it or not, understanding the financial strength of a company is the most crucial step in analyzing a stock. Without understanding financials, you cannot actually think like an analyst. You should be able to understand a company's balance sheet, income statement and cash flow statements. Often, numbers lying in the financial statements speak louder than the glossy words of an annual report. In case you are not comfortable with numbers, no need to hesitate, just start learning as early as possible.

 Management Quality

Analysts also focus on management quality. It is often said that there are no good or bad companies, only good or bad managers. Key executives are responsible for the future of the company. You can assess company management and board quality by doing some research on the Internet. Tons of information is available.

 Growth Analysis

Ultimately, stock prices follow earnings. So in order to know whether stock prices would be moving up or down in the future, you need to know where future earnings are heading. Unfortunately, there is no a quick formula that can tell you what to expect for future earnings. Analysts make their own estimates by analyzing past figures of sales growth and profit margins, along with profitability trends in that particular industry. It's basically connecting what has happened in the past to what's expected to happen in the future. Making accurate enough earnings forecasts is the ultimate test of your stock analysis capabilities, because it's a good indication of how well you understand those industries and companies.


Once you know about future earnings, the next step is to know about the worth of a company. What should be the worth of your company's stocks? Analysts need to find out how much the current market price of the stocks is justified in comparison to the company's value. There is no "correct value," and different analysts use different parameters. Value investors look at intrinsic worth whereas growth investors look at earning potential. A company selling at a higher P/E ratio must grow at a higher price to justify its current price for growth investors.

The Bottom Line

The ultimate goal of every investor is to make a profit. However, as the saying goes, not all roads lead to Rome. Never blindly accept what stock analysts have to say and always do your own research. Not everybody can be an investing expert, but you can always improve your analytical skills when it comes to stocks.

Saturday, July 9, 2016

Having A Plan: The Basis Of Success

Courtesy : Investopedia

"To invest successfully over a lifetime does not require a stratospheric IQ, unusual business insights, or inside information. What's needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework." Warren E. Buffett 

Any veteran market player will tell you that it's vital to have a plan of attack. Formulating the plan is not particularly difficult, but sticking to it, especially when all other indicators seem to be against you, can be. This article will show why a plan is crucial, including what can happen without one, what to consider when formulating one as well as the investment vehicle options that best suit you and your needs.

The Benefits

As the "Sage of Omaha" says, if you can grit your teeth and stay the course regardless of popular opinion, prevailing trends or analysts' forecasts, and focus on the long-term goals and objectives of your investment plan, you will create the best circumstances for realizing solid growth for your investments.

Maintain Focus

By their very nature, financial markets are volatile. Throughout the last century, they have seen many ups and downs, caused by inflation, interest rates, new technologies, recessions and business cycles. In the late 1990s, a great bull market pushed the Dow Jones Industrial Average (DJIA) up 300% from the start of the decade. This was a period of low interest rates and inflation, and increased usage of computers, all of which fueled economic growth. The period between 2000 and 2002, on the other hand, saw the DJIA drop 38%. It began with the bursting of the internet bubble, which saw a massive sell-off in tech stocks and kept indexes depressed until mid-2001, during which there was a flurry of corporate accounting scandals as well as the September 11th attacks, all which contributed to weak market sentiment.

In such a fragile and shaky environment, it's crucial to keep your emotions in check and stick to your investment plan. By doing so, you maintain a long-term focus and can assume a more objective view of current price fluctuations. If investors had let their emotions be their guide near the end of 2002 and sold off all their positions, they'd have missed a 44% rise in the Dow from late-2002 to mid-2005.

Sidestepping the Three Deadly Sins

The three deadly sins in investing play off three major emotions: fear, hope and greed. Fear has to do with selling too low - when prices plunge, you get alarmed and sell without re-evaluating your position. In such times, it is better to review whether your original reasons (i.e. sound company fundamentals) for investing in the security have changed. The market is fickle and, based on a piece of news or a short-term focus, it can irrationally oversell a stock so its price falls well below its intrinsic value. Selling when the price is low, which causes it to be undervalued, is a bad choice in the long run because the price may recover.

The second emotion is hope, which, if it is your only motivator, can spur you to buy stocks based on their past performance. Buying on the hope that what has happened in the past will happen in the future is precisely what occurred with internet plays in the late '90s - people bought nearly any tech stock, regardless of its fundamentals. It is important that you look less at the past return and more into the company's fundamentals to evaluate the investment's worth. Basing your investment decisions purely on hope may leave you with an overvalued stock, with which there is a higher chance of loss than gain. 

The third emotion is greed. If you are under its influence, you may hold onto a position for too long, hoping for a few extra points. By holding out for that extra point or two, you could end up turning a large gain into a loss. During the internet boom, investors who were already achieving double-digit gains held on to their positions hoping the price would inch up a few more points instead of scaling back the investment. Then, when prices began to tank, many investors didn't budge and held out in the hope that their stocks would rally. Instead, their once-large gains turned into significant losses. 

An investment plan that includes both buying and selling criteria helps to manage the three deadly sins of investing. 

The Key Components 

Determine Your Objectives
The first step in formulating a plan is to figure out what your investment objective is. Without a goal in mind, it is hard to create an investment strategy that will get you somewhere. Investment objectives often fall into three main categories: safety, income and growth. Safety objectives focus on maintaining the current value of a portfolio. This type of strategy would best fit an investor who cannot tolerate any loss of principal and should avoid the risks inherent in stocks and some of the less secure fixed-income investments. If the goal is to provide a steady income stream, then your objective would fall into the income category. This is often for investors who are living in retirement and relying on a stream of income. These investors have less need for capital appreciation and tend to be risk averse.

Growth objectives focus on increasing the portfolio's value over a long-term time horizon. This type of investment strategy is for relatively young investors who are focused on capital appreciation. It's important to take into account your age, your investment time frame and how far you are from your investment goal. Objectives should be realistic, taking into account your tolerance for risk. 

Risk Tolerance
Most people want to grow their portfolios to increase wealth, but there remains one major consideration - risk. How much, or how little, of it can you take? If you are unable to stomach the constant volatility of the market, your objective is likely to be safety or income focused. However, if you are willing to take on volatile stocks then a growth objective may suit you. Taking on more risk means you are increasing your chances of realizing a loss on investments, as well as creating the opportunity of greater profits. However, it is important to remember that volatile investments don't always make investors money. The risk component of a plan is very important and requires you to be completely honest with yourself about how much potential loss you are willing to take. 

Asset Allocation

Once you know your objectives and risk tolerance, you can start to determine the allocation of the assets in your portfolio. Asset allocation is the dividing up of different types of assets in a portfolio to match the investor's goals and risk tolerance. An example of an asset allocation for a growth-oriented investor could be 20% in bonds, 70% in stocks and 10% in cash equivalents.

It is important that your asset allocation is an extension of your objectives and risk tolerance. Safety objectives should comprise the safest fixed-income assets available like money market securities, government bonds and high-quality corporate securities with the highest debt ratings. Income portfolios should focus on safe fixed-income securities, including bonds with lower ratings, which provide higher yields, preferred shares and high-quality dividend-paying stocks. Growth portfolios should have a large focus on common stock, mutual funds or exchange-traded funds (ETFs). It is important to continually review your objectives and risk tolerance and to adjust your portfolio accordingly.
The importance of asset allocation in formulating a plan is that it provides you with guidelines for diversifying your portfolio, allowing you to work toward your objectives with a level of risk that is comfortable for you.

The Choices.

Once you formulate a strategy, you need to decide what types of investments to buy as well as what proportion of each to include in your portfolio. For example if you are growth oriented, you might pick stocks, mutual funds or ETFs that have the potential to outperform the market. If your goal is wealth protection or income generation, you might buy government bonds or invest in bond funds that are professionally managed.If you want to choose your own stocks it is vital to institute trading rules for both entering and exiting positions. These rules will depend on your plan objectives and investment strategy. 

You may also consider professionally managed products like mutual funds, which give you access to the expertise of professional money managers. If your aim is to increase the value of a portfolio through mutual funds, look for growth funds that focus on capital appreciation. If you're income-orientated, you'll want to choose funds with dividend-paying stocks or bond funds that provide regular income. Again, it is important to ensure that the allocation and risk structure of the fund is aligned with your desired asset mix and risk tolerance. Other investment choices are index funds and ETFs. The growing popularity of these two passively managed products is largely due to their low fees and tax efficiencies; both have significantly lower management expenses than actively managed funds. These low-cost, well-diversified investments are baskets of stocks that represent an index, a sector or country, and are an excellent way to implement your asset allocation plan.


An investment plan is one of the most vital parts for reaching your goals - it acts as a guide and offers a degree of protection. Whether you want to be a player in the market or build a nest egg, it's crucial to build a plan and adhere to it. By sticking to those defined rules, you'll be more likely to avoid emotional decisions that can derail your portfolio, and keep a calm, cool and objective view even in the most trying of times.

Saturday, June 25, 2016

The 15 greatest business rivalries of all time ...

 Courtesy : Rediff

Wadias and Ambani
There are several stories on how the war between the two started. Some say that it was a fight between old money and new money. Nusli Wadia had a business pedigree where as Dhirubhai, who started out as a petrol station attendant, had an amazing rags-to-riches story.His vaulting ambition, his appetite for risk and larger-than-life image made him a natural target for those who resented his meteoric rise to the top of the business ladder.During the Janata Party rule (1977- 1979), Nusli Wadia obtained the permission to build a 60000 tpa di-methyl terephtalate (DMT) plant.However, before his letter of intent could be converted into a license, the government changed and when the Congress government came to power, his license was delayed (until 1981) with one pretext or the other.This was the same time when Dhirubhai obtained license to build a PTA plant. Dhirubhai was also contemplating on building a Paraxylene facility.All this infuriated Wadia and it marked the beginning of the Ambani-Wadia battle where Ramnath Goenka, then Indian Express proprietor, joined forces with Wadia.

Shaw Wallace and UB Group
In the early 1980s, Vijay Mallya joined hands with Manu Chhabria to bid for Shaw Wallace. However, due to tight currency regulations at the time, Mallya didn’t come out in open about partnering Chhabria, a non-resident Indian.Chhabria took over Shaw Wallace, shrugged off Mallya's claim for the company and triggered one of India's most enduring corporate rivalries between Shaw Wallace and the UB Group.In 2005, UB Group signed a deal with Jumbo World Holdings Limited in Dubai to acquire Shaw Wallace for Rs 1,300 crore (Rs 13 billion).Around the time Mallya acquired Shaw Wallace, Manu Chhabria was already dead. Mallya dealt with his wife Vidya Chhabria.

Wadia and Rajan Pillai
As soon as the battle with Reliance had cooled off in the late 1980s, Nusli Wadia launched an all-out attack to acquire Britannia Industries. An American company named Nabisco Brands Inc owned Britannia then.Wadia’s friend Rajan Pillai was managing Britannia in all over Asia. He was called the 'Biscuit King'.Through Pillai, Wadia approached Nabisco’s management and expressed interest in acquiring Britannia but the offer was turned down.On the contrary, Nabisco made Pillai chairman of Britannia. Soon after, the two friends turned into bitter rivals.Pillai partnered French food company Danone to expand the business but the latter broke the partnership and joined hands with Wadia. Danone accused Pillai of fraud.After a long boardroom battle, Pillai ceded control to Wadia. and later Pillai died in prison.

Mukesh Ambani and Anil Ambani
Mukesh Ambani and Anil Ambani split their businesses between them after their father Dhirubhai Ambani died. There was lot of friction between the two since the split but it acquired new heights when the two brothers reached court over a dispute.Mukesh Ambani's Reliance Industries Limited agreed to sell Anil Ambani's Reliance Natural Resources Limited 80 mmscmd of gas from the Krishna-Godavari Basin for 17 years at $2.34 per mmbtu - for its Dadri power plant.With RIL stopped supplying the gas, RNRL went to court against RIL for not implementing this part of a family MoU signed when the empire was being carved up between the two brothers.The Supreme Court delivered a judgement which experts said was in favour of Mukesh Ambani.Few months after the court case, the two brother announced that they have scrapped all existing non-compete agreements, allowing either group to enter sectors that had earlier been reserved for one of them.In 2013, Ambani brothers joined hands for a telecom deal. Valued at Rs 1,200-crore, the deal lets Mukesh Ambani use his younger sibling's optic fibre network for launch of his telecom venture.
L&T and RIL
L&T’s tryst with the Ambanis started after Manu Chhabria, a takeover-tycoon, started making attempts to acquire L&T in 1987.No one person or institution was majority stakeholders in L&T, which made the company a sitting duck for acquisition.While Chhabria was acquiring shares of L&T, Dhirubhai Ambani too started buying the construction firm’s stocks. Then L&T Chairman NM Desai opted to join hands with Ambani, a fellow Gujarati, to prevent L&T falling in hands of Chhabria.The first battle was fought between Ambani and Chhabria. The latter lost due to Ambani’s political clout.Dhirubhai Ambani soon came on the board of L&T and became the chairman. L&T was a blue-chip and had easier access to cash. The engineering giant was just what the Ambanis needed to set up their cracker project without putting up the necessary funds.Soon after assuming control, Ambani forced L&T to grant supplier's credit of Rs 570 crore to reliance for its project.Ambani’s game, however, could not last long. They were forced to abort their plans after their arch-rival VP Singh came to power in Delhi in 1989. The management control was restored back to the institutions.

McDonalds and Burger King
Their rivalry is famous as Burger Wars. That’s because both the companies have been hitting out each other through their advertisements and marketing campaign.One famous advertisement is of Burger King attacking McDonald’s on the size of its hamburgers.In October, McDonalds announced it would stop serving Heinz ketchup in its stores. Why? Because Bernardo Hees, former chief executive of Burger King became chief executive of Heinz.
Tesco and Sainsbury’s
Tesco and Sainsbury’s are the two biggest retailers in the UK. Their battle is termed as Trolley Wars.
Sainsbury’s was started in 1869 and constantly grew to be the largest retailer in UK until 1995. Tesco, which was founded in 1919, overtook Sainsbury’s as the top UK retailer.
The two companies have been fighting it out in their advertisement and even while acquiring companies.

Apple and Microsoft
You can say that the original rivalry betwen Microsoft and Apple started with a court case.
Apple had agreed to license certain parts of its GUI to Microsoft for use in Windows 1.0, but when Microsoft made changes in Windows 2.0 adding overlapping windows and other features found in the Macintosh GUI, Apple filed suit, according to Wikipedia.Apple added additional claims to the suit when Microsoft released Windows 3.0.The court’s decision was largely in favour of Microsoft.Since then, the two companies have been talking negative about each other’s products. For example, Apple CEO Tim Cook to analyst during the company’s earning call: "I haven't personally played with the Surface yet… but what we're reading about it that it's a fairly compromised, confusing product." On the other hand, Microsoft Surface tablet’s advertisement shows things iPad cannot do and makes fun of Siri.
Adidas and Puma
Adidas was founded in 1948 in Germany by Adolf Dassler, after splitting from his elder brother Rudolf - who later established Puma.The brothers’ relationship went sour during the World War II. After the war was over they went their separate ways.Puma and Adidas entered a fierce and bitter rivalry after the split. The town of Herzogenaurach (where they lived) was divided on the issue, leading to the nickname "the town of bent necks". That’s because people looked down to see which shoes strangers wore before talking to them, according to Wikipedia.In 2009 employees of both the companies played a friendly soccer match symbolising end of the 60-year-old feud. However, both the Dassler brothers had passed away by this time.

Airbus and Boeing
In the large jet airliner business, it’s only two companies that rule the roost - Airbus and Boeing.
Though the companies have been competing for a long time, the battle got intense when global airspace industry got consolidated after both the companies went on merger and acquisition spree in the 1990s.
The two are engaged in neck and neck completion. From 2003 - 2012, Airbus has received 7,714 orders and delivered 4,503, and Boeing has received 7,312 orders and delivered 4,091, according to Wikipedia.Both the companies regularly accuses the other of receiving unfair state aid from their respective governments.In fact, in May 2005 the United States filed a case with World Trade Organisation against the European Union for providing allegedly illegal subsidies to Airbus. Twenty-four hours later the European Union filed a complaint against the United States protesting support for Boeing.

Sky and BT
Sky and BT have been battling each other in the broadband market for a long time. But the rivalry reached new heights after BT started bidding for Premier League football licenses.To take away Sky's loyal football fans, BT launched a huge marketing campaign using a range of celeb presenters. BT's move into Premier League football has sent license fees rocketing, which has dented Sky's profits.

Procter & Gamble and Unilever
FMCG companies Unilever and Procter & Gamble (P&G) dominate the global consumer goods market. The rivalry between the two got intense after the Anglo-Dutch company Unilever entered the US market.The competition between the two is so intense that P&G had hired espionage agents to spy on Unilever and get information on the hair care business. The agents were caught and P&G paid Unilever $10 million.At one point, P&G had confessed looking through Unilever’s trash for information on its products and strategy.Unilever has brands such as Dove, Axe, Vaseline, Lux, Ponds, and Sunsilk.P&G is equipped with brands such as Head & Shoulder, Olay, Pantene, Gillette, Oral-B, and Ariel.

Apple and Samsung
Apple gave the world its first true touch screen smartphone. It pioneered the concept and turned the innovation into booming profit. Then came along a powerful Asian manufacturer Samsung electronics.
Using Google’s Android software it created smartphones and tablets that were similar to Apple products. It slowly started gaining market share, hurting Apple’s margins.In turn, Apple launched patent infringement suits and got the verdict partially in its favour. The Korean rival, however, flooded the market with products that rivalled Apple’s and were cheaper.Last quarter, Samsung managed to sell almost three times as many smartphones as rival Apple, according to Gartner.

Energiser and Duracell
Duracell was the first ever company to introduce an alkaline battery into the market but in 1959 the Energiser battery was introduced by Eveready. Competitive products started the rivalry that has lasted over 50 years now.In 1970, Duracell created an ad campaign featuring the Duracell bunny - the Energiser bunny followed very quickly, and much to Duracell's annoyance, became the more memorable mascot.
Coke and Pepsi
It will be apt to call the rivalry between Coke and Pepsi as a war. In fact, their advertising campaign targeting each other is called Cola Wars.Pepsi adverts often focus on celebrities choosing Pepsi over Coca-Cola, supporting Pepsi's positioning as the soft drink for the new generation.Since 1975, Pepsi started showing people in blind taste tests called the Pepsi Challenge. In this campaign. consumers are blindfolded and asked to choose the Cola they like from different available and most of them choose Pepsi.The war even went to space. In 1985, Coca-Cola and Pepsi were launched into space aboard the Space Shuttle Challenger.The companies had designed special cans to test packaging and dispensing techniques for use in zero G conditions. However, none of their units worked as expected, according to Wikipedia.

Saturday, June 11, 2016

10 Tips for the Successful Long-Term Investor

Courtesy : Investopedia

While it may be true that in the stock market there is no rule without an exception, there are some principles that are tough to dispute. Let's review 10 general principles to help investors get a better grasp of how to approach the market from a long-term view. Every point embodies some fundamental concept every investor should know.

1. Sell the Losers and Let the Winners Ride!

Time and time again, investors take profits by selling their appreciated investments, but they hold onto stocks that have declined in the hope of a rebound. If an investor doesn't know when it's time to let go of hopeless stocks, he or she can, in the worst-case scenario, see the stock sink to the point where it is almost worthless. Of course, the idea of holding onto high-quality investments while selling the poor ones is great in theory, but hard to put into practice. The following information might help:
  • Riding a Winner - Peter Lynch was famous for talking about "tenbaggers", or investments that increased tenfold in value. The theory is that much of his overall success was due to a small number of stocks in his portfolio that returned big. If you have a personal policy to sell after a stock has increased by a certain multiple - say three, for instance - you may never fully ride out a winner. No one in the history of investing with a "sell-after-I-have-tripled-my-money" mentality has ever had a tenbagger. Don't underestimate a stock that is performing well by sticking to some rigid personal rule - if you don't have a good understanding of the potential of your investments, your personal rules may end up being arbitrary and too limiting. 
  • Selling a Loser - There is no guarantee that a stock will bounce back after a protracted decline. While it's important not to underestimate good stocks, it's equally important to be realistic about investments that are performing badly. Recognizing your losers is hard because it's also an acknowledgment of your mistake. But it's important to be honest when you realize that a stock is not performing as well as you expected it to. Don't be afraid to swallow your pride and move on before your losses become even greater.
In both cases, the point is to judge companies on their merits according to your research. In each situation, you still have to decide whether a price justifies future potential. Just remember not to let your fears limit your returns or inflate your losses

2. Don't Chase a "Hot Tip."

Whether the tip comes from your brother, your cousin, your neighbor or even your broker, you shouldn't accept it as law. When you make an investment, it's important you know the reasons for doing so; do your own research and analysis of any company before you even consider investing your hard-earned money. Relying on a tidbit of information from someone else is not only an attempt at taking the easy way out, it's also a type of gambling. Sure, with some luck, tips sometimes pan out. But they will never make you an informed investor, which is what you need to be to be successful in the long run.

3. Don't Sweat the Small Stuff.

As a long-term investor, you shouldn't panic when your investments experience short-term movements. When tracking the activities of your investments, you should look at the big picture. Remember to be confident in the quality of your investments rather than nervous about the inevitable volatility of the short term. Also, don't overemphasize the few cents difference you might save from using a limit versus market order.
Granted, active traders will use these day-to-day and even minute-to-minute fluctuations as a way to make gains. But the gains of a long-term investor come from a completely different market movement - the one that occurs over many years - so keep your focus on developing your overall investment philosophy by educating yourself.

4. Don't Overemphasize the P/E Ratio.

Investors often place too much importance on the price-earnings ratio (P/E ratio). Because it is one key tool among many, using only this ratio to make buy or sell decisions is dangerous and ill-advised. The P/E ratio must be interpreted within a context, and it should be used in conjunction with other analytical processes. So, a low P/E ratio doesn't necessarily mean a security is undervalued, nor does a high P/E ratio necessarily mean a company is overvalued.

5. Resist the Lure of Penny Stocks.

A common misconception is that there is less to lose in buying a low-priced stock. But whether you buy a $5 stock that plunges to $0 or a $75 stock that does the same, either way you've lost 100% of your initial investment. A lousy $5 company has just as much downside risk as a lousy $75 company. In fact, a penny stock is probably riskier than a company with a higher share price, which would have more regulations placed on it.

6. Pick a Strategy and Stick With It.

Different people use different methods to pick stocks and fulfill investing goals. There are many ways to be successful and no one strategy is inherently better than any other. However, once you find your style, stick with it. An investor who flounders between different stock-picking strategies will probably experience the worst, rather than the best, of each. Constantly switching strategies effectively makes you a market timer, and this is definitely territory most investors should avoid. Take Warren Buffett's actions during the dotcom boom of the late '90s as an example. Buffett's value-oriented strategy had worked for him for decades, and - despite criticism from the media - it prevented him from getting sucked into tech startups that had no earnings and eventually crashed.

7. Focus on the Future.

The tough part about investing is that we are trying to make informed decisions based on things that have yet to happen. It's important to keep in mind that even though we use past data as an indication of things to come, it's what happens in the future that matters most.
A quote from Peter Lynch's book "One Up on Wall Street" (1990) about his experience with Subaru demonstrates this: "If I'd bothered to ask myself, 'How can this stock go any higher?' I would have never bought Subaru after it already went up twentyfold. But I checked the fundamentals, realized that Subaru was still cheap, bought the stock, and made sevenfold after that." The point is to base a decision on future potential rather than on what has already happened in the past.

8. Adopt a Long-Term Perspective.

Large short-term profits can often entice those who are new to the market. But adopting a long-term horizon and dismissing the "get in, get out and make a killing" mentality is a must for any investor. This doesn't mean that it's impossible to make money by actively trading in the short term. But, as we already mentioned, investing and trading are very different ways of making gains from the market. Trading involves very different risks that buy-and-hold investors don't experience. As such, active trading requires certain specialized skills.
Neither investing style is necessarily better than the other - both have their pros and cons. But active trading can be wrong for someone without the appropriate time, financial resources, education and desire.

9. Be Open-Minded.

Many great companies are household names, but many good investments are not household names. Thousands of smaller companies have the potential to turn into the large blue chips of tomorrow. In fact, historically, small-caps have had greater returns than large-caps; over the decades from 1926-2001, small-cap stocks in the U.S. returned an average of 12.27% while the Standard & Poor's 500 Index (S&P 500) returned 10.53%.
This is not to suggest that you should devote your entire portfolio to small-cap stocks. Rather, understand that there are many great companies beyond those in the Index, and that by neglecting all these lesser-known companies, you could also be neglecting some of the biggest gains.

10. Be Concerned About Taxes, but Don't Worry.

Putting taxes above all else is a dangerous strategy, as it can often cause investors to make poor, misguided decisions. Yes, tax implications are important, but they are a secondary concern. The primary goals in investing are to grow and secure your money. You should always attempt to minimize the amount of tax you pay and maximize your after-tax return, but the situations are rare where you'll want to put tax considerations above all else when making an investment decision .

The Bottom Line

There are exceptions to every rule, but we hope that these solid tips for long-term investors and the common-sense principles we've discussed benefit you overall and provide some insight into how you should think about investing.


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