Investing concepts can be simple to understand but easy to forget.
And it’s even harder to put in practice.
It’s not for the lack of effort.
Most aspiring investors would have dutifully read Ben Graham’s classics or studied volumes of Warren Buffett’s letters to shareholders. With the world’s information a click or a tap way, I am sure that you would have done your own fair share of reading.
It’s also not a lack of understanding.
The most important investing principles are within everyone’s grasp.
Interestingly, what I found is that the concepts that matter the most are easy to learn but just as easily brushed over.
The disconnect becomes apparent when investors start to put their well-earned knowledge into practice.
My challenge today is to get you to remember three core investing principles that are all too often left behind when they shouldn’t be.
Let’s get started.
1. Challenge #1: You’re buying a business, not a stock
When you invest a stock, you’re buying a piece of the business.
This concept is as straightforward as it can be. But in practice, investors often behave in contradiction to what is being learnt.
What I have observed is that when a stock price goes down, anxious investors are quickly caught in a conundrum. The questions that arise are often the same:
1. Should I buy more of the stock?
2. What if shares keep falling after I buy?
3. Should I sell to avoid further losses?
These are all valid questions and concerns.
After all, you have your hard-earning money at stake and want to make the best decision.
The solution, however, can be found by going back to the core principle.
When you buy a stock, you become a part-owner of a business. And that is where your focus should always be — the business. It follows that you should let business developments, not stock prices, inform you of what to do next.
What you want to avoid is stock price movements triggering you to make the wrong decisions.
2. Challenge #2: You’re investing for the long term
Investing with a long term horizon brings the best results.
Most investors worth their salt would agree.
From one quarter to the next, the duration is too short for any management team to make a meaningful difference. But if we can extend the quarters into years or decades, the performance that can be delivered can astound us.
The best part about the deal is that holding stocks for the long term couldn’t be easier.
Just do nothing. Or so it seems.
In practice, what I find is that market events and economic events can distract even the most well-intentioned investor.
For instance, in 2016, the results of Brexit referendum spooked stock markets around the world.
Back then, worried investors selling their stocks would be wrong.
Don’t let that happen to you.
Over than four years would pass before a Brexit agreement was signed. Meanwhile, businesses around the world have carried on, and stock prices have risen as a result.
Today, there are worries over inflation and interest rates.
Both can have an impact on certain companies in the near term. But if you have your long term cap on, you not be looking at what is happening in the next few days or next few months.
Instead, your challenge is to cast your eyes to 10 years from now.
Which are the companies that are likely to be still around, and thriving?
3. Challenge #3: Reach for your goals, not other people’s goals
My third challenge is less about investing concepts and more about life goals.
But it is no less important.
That’s because everyone has their own aspirations.
Maybe your goal is to generate income for your own retirement needs. Or maybe you could be looking to grow your wealth so that you will have the freedom to choose a better adventure.
And maybe it’s both income and growth.
There is nothing wrong with having your own goals. After all, we all invest for a reason.
The challenge is whether we have the discipline to follow through with what we want to achieve.
I have found that investors have the tendency to push aside their own goals when a new, exciting stock comes along.
But what’s exciting today might not fit what you need for your long term goals.
If you are looking for income, you need a stock that pays a dividend, preferably with a business that has a long history of paying our dividends within its financial means.
Altertively, if it is capital growth you seek, then the stock you buy has to have a business that offers both a long runway and a track record of growth.
The key here is to remain focusing on your own goals and not get distracted the next stock opportunity that comes along.
It’s easier said that done.
Along the way, you have to accept that you will miss out on some of the gains from stocks that don’t meet your needs.
But in return, if you stay focused, you stand a better chance in achieving your goals.
The trade-off, in my eyes, will prove to be far better for your financial well being.
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Disclosure: Chin Hui Leong does not owns any of the shares mentioned.