Here’s part 2 of our stock investing tips for beginners to help you become a better stock investor. Read more at Cashay.com
- In part one, we helped you get started on the path to make you a better stock investor. Here's part two about buying stocks.
First, buy low sell high. If you let stock prices alone guide your buy and sell decisions, you're letting the tail wag the dog. When stocks have fallen, they are low, and that is generally the time to buy. When stocks have skyrocketed, they are high, and that is generally the time to sell. So don't let fear when stocks fall or greed when stocks rise take over your decision-making.
Second, watch where you anchor. In behavioral Finance, anchoring is mentally clinging to a specific reference point. For example, if you focus on what you paid for a stock, you're focused on an irrelevant data point from the past. Remember, stocks are priced and eventually weighed on the estimated value of future cash flows businesses will produce. Focus on this.
Three, economics usually trumps management. Keep in mind that management can change quickly while the economics of a business are usually much more static. Given the choice between wide-moat, cash cow businesses with mediocre management and no-moat, terrible return businesses with bright management, take the former.
Fourth, be careful of snakes. Though the economics of a business is key, the stewards of a company's capital are still important. Even wide-moat businesses can be poor investments if snakes are in control. If you find a company that has management practices or compensation that makes your stomach turn watch out.
Last, remember that past trends often continue. One of the most often heard disclaimers in the financial world is past performance is no guarantee of future results. While this is true, past performance is still a pretty good indicator of how people will perform again in the future. This applies not just to investment managers but company managers as well.
Great managers often find new business opportunities in unexpected places. If a company has a strong record of entering and profitably expanding new lines of business, make sure to consider this when valuing the firm. Don't be afraid to stick with winning managers. Stay financially fit, friends.