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Get Smart: 3 Tests You Have To Pass Before Buying Your Next Stock

Every week, there will be stocks are at or near their 52-week low. 

Some of these low stock prices may be opportunities. 

In Singapore, there has been no shortage of potential opportunities over the past month. For those who are curious, I have highlighted three stocks that have fallen in my article here

These beaten-down stocks could be investment opportunities … but the important question to ask yourself is: are they the right opportunity for you? 

In fact, I think that there are three important tests that each investment opportunity should pass before investors commit money to a stock. 

1. Buy because you want to own the company and not because the stock has fallen. 

Falling share prices can be alluring.

Often times, you can feel compelled to buy out of the fear of missing out on gains. Even worse, the lure of lower stock prices can cause you to forget the financial goals that you have set out for yourself.     

As such, the key question you should ask is whether you are buying the stock because you want to own the company behind it, or because the stock price has fallen. 

For me, a lower stock price alone is not a good enough reason to buy a stock. In my book, you succeed when you buy stocks that help you achieve your goals. 

Now, if the lower stock price coincides with the stock you want to own, then by all means, consider the stock. 

But if that stock isn’t what your portfolio needs, you have to be comfortable in letting the stock go, even if it means missing out on an opportunity.

2. Fallen stocks are not the only opportunities.

Stocks that decline significantly tend to attract attention from investors. Sometimes, rightly so. 

Investors tend to be attracted by falling stock prices because there could be a bargain or two in the midst. 

However, it is important to remember that the best investment opportunity does not always happen when stock prices decline. Often times, the best companies are priced at a premium and could be a better place for your money. 

The point is, if you become too focused on the group of the stocks that have fallen, you may miss out on other stocks that may be more worthy of your money. 

Always remember that there is a whole universe of other stocks to consider. Avoid tunnel vision.   

3. Buy with conviction. After that, be humble. 

Buying a stock is an arrogant act. 

When you buy a stock, you are saying that you know more than the person selling that stock to you. That’s arrogant. 

However, there is a fine line between having conviction and being dismissive of risks that are inherent in any stock. 

To avoid overconfidence, you have to balance your initial conviction with humility after you buy the stock. 

That is especially important when there are numerous investment opportunities available to you. 

When faced with multiple bargains, you have to find the discipline to not overweight your portfolio on one single stock. When that happens, your financial goals (such as your retirement) is riding on a single positive outcome. 

In addition, you got to have the discipline to set a pace of investing that suits you. The pace should be in line with your level of knowledge of the company that you are buying. 

That way, you would not be drawn into committing too much of your own cash before your own knowledge is up to mark.  

Get Smart: Discipline to succeed 

When it comes to putting your plan to work, discipline is the operative word. 

Ultimately, you succeed in investing when you achieve your personal goals. 

To do that, you got to have the discipline to let go of investment opportunities that do not meet your criteria or help you towards your financial goals. 

And when you find the right company to invest in, you have to learn how to pace yourself. Do not overcommit to the point where you are too concentrated on a few stocks. 

Everyone, even the smartest investors, can make mistakes.  

In sum, the best investment results are gained when you diligently add the right companies, invest in prudent amounts, and find the humility to admit it when you are wrong. 

The journey ahead is made easier when you have like-minded people with you. And we will be here to guide you along.  

If you’d like to learn more investing concepts, and how to apply them to your investing needs, sign up for our free investing education newsletter, Get Smart! Click HERE to sign up now.

None of the information in this article can be constituted as financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life.