One of my friends asked me for advice on where to put his money. As a matter of principle, I don’t give investment advice to friends because I know that I would almost certainly lose a friend if that investment went sour. Importantly, I am not a professional asset manager. That said, I do invest for my own account so I am willing to give tips that I find beneficial.
To top up my knowledge, I picked up a copy of The Intelligent Investor by Benjamin Graham but I personally didn’t find it useful so I decided to set out a few of my own tips for successful investing.
I have invested successfully in the past. My best success was Apple: I bought Apple at $78 in 2006 and sold it at about $280 in the 2009. At the time I felt like a don and I didn’t hesitate to show off to my friends. I sold my shares at the high of that time but if I had known they would be hitting $600 some day I would have sat tight and braced the hard times. Never mind.
Personally, this is how I invest in shares:
1. Buy low, sell high.
The saying is a bit clichéd but the whole point of investing is to make as big a profit as possible; to this end, you need to sell higher than where you bought.
With this in mind, I usually decide on which region of the world I want to invest in, so if it’s the UK I am interested in, I download Bloomberg data for a given UK index e.g. the FTSE 100, for the top 100 UK companies. I then sort the list by the 52 week low, divide that by the current price and see which shares are trading near their 52-week low.
Trading at the 52-week low does not immediately mean I will buy that stock but it gives me a good starting point. I hate buying shares that are near their 52-week high because I psychologically think they are more likely to come down. That said, I will still look at the names of shares near the 52-week high carefully to consider if it’s a pattern that might continue.
2. Consider your time.
If you don’t have time to pick stocks carefully and to monitor your portfolio periodically, get an investment advisor.
3. Consider your skills.
Do you feel comfortable investing? You don’t need to have a background in finance to understand the stock market but you do need to pick up a few books to understand how it works. If you don’t think you have the necessary skill-set, get an investment advisor.
4. Think long-term.
I am not into speculating. I might give speculation a go at some point but if so I would allocate a small, fixed budget for that purpose. I personally think that you are more likely to make successful investments if you are looking for a stock that will perform well in the long-run than if you are shooting for short-term, fast profits.
5. Look at how much debt the company has relative to how much they earn.
Companies with high levels of debt are more likely to run into problems. If there is a good reason for the high leverage then you need not worry too much but you still need to be wary.
6. Look for companies that produce something.
Call me old fashioned but I prefer to invest in companies that have a tangible product. A product that people actually want and need and will keep wanting and needing in large numbers for a long time to come. If I think it’s a fad, I will not invest. #Facebook?!
7. Don’t sell just because the going gets tough.
Share prices go up and they go down. If a company has done a major wrong and you think it could lead to bankruptcy, get out whilst you can. If you think that the market is just overreacting, then sit tight and wait for recovery.
8. Decide on your selling rules.
Decide on what price you want to sell your shares at and if it reaches that price, try not to change the rules unless there has been a fundamental change in the company’s strategy that warrants a change in your selling price. People lose money because they get carried away with a good run and think it will last forever.
9. Consider the dividend yield.
If you are interested in the size of dividends that are going to be paid make sure to go for stocks that pay higher dividends. However, if you are young, or are in a high tax bracket you should be more interested in seeing your asset base grow.
Dividends can be a great source of income when you are retired but are less necessary when you’re in employment and earning enough to cover your needs.
10. Read the news.
In this day and age, there is no excuse for not being current with global news. Knowledge will guide your investments.