New Year’s Resolutions For Successful Investing In 2012
The New Year is underway. And the markets are kicking it off in grand fashion. The Dow jumped 1.5% on the first trading day of 2012.
Not a bad way to start the year!
Of course, with a new year upon us, it’s time to make New Year’s resolutions. Most people use this as an opportunity to go on a diet or give up bad habits. But I like to use resolutions as an opportunity to improve my investing.
So, in continuing with the spirit of resolutions, I’m going to tell you about three resolutions that I made many years ago. They’ve served me well over the years. And I hope you’ll find them helpful in your trading.
My first resolution is fairly simple… before you buy a stock, understand how the business makes money.
Believe it or not… many investors own stock in companies they don’t understand.
That’s a sure fire way to lose your money.
You see, understanding how a business makes money is vital when owning a company for the long term. Since a company’s value most often hinges on the cash flows it produces, knowing how those cash flows are generated is pretty important.
For example… yesterday my colleague, Corey Williams, wrote about Chipotle (CMG). The company obviously makes money by selling more and more burritos. Apple (AAPL) grows its profits by selling iPads, iMacs and iPhones. Apple then makes more money when those buyers purchase apps from the App Store.
So, when I see long lines at Chipotle and the Apple store, it doesn’t take an MBA to figure out they’re making lots of money. Under-standing how a business makes money will allow you to quickly figure out if it’s in for good or bad times ahead.
From there, it’s easier to determine if a stock should be owned or not.
Second on the resolution list… allow market volatility to work to your advantage.
It’s a long known fact, most inexperienced investors mistake volatility for risk. They see a stock going up and down and automatically see it as a risky trade. But that’s not always the case.
You see, risk is the probability of suffering a permanent loss of capital. Volatility, on the other hand, is the movement in a stock’s price. Just because a stock fluctuates up and down doesn’t mean your probability of permanent loss has increased. In fact, volatility can actually help you make money.
Viewed this way, investors can take advantage of market volatility to buy shares at better prices.
For example, I used volatility in 2011 to buy Goldman Sachs (GS) when shares traded below $90 (just a few months earlier the stock was trading around $175). Since I believe the true value of GS is around $200 a share, I feel like the market volatility in GS gave me a golden opportunity for big profits. And when Mr. Market gave me a chance to buy GS shares on the cheap, I jumped at the opportunity.
With Europe still in trouble and the US economy far from healed, volatility will most likely continue in 2012.
In short… investors armed with patience and conviction in 2012 will be better able to take advantage of the market’s wild swings. Unfortunately, those investors looking to get in and out of stocks are more likely to be hurt badly by market volatility.
Lastly and most important… focus on hitting singles and doubles, and stay away from trying for home runs.
Obviously, I relate this to baseball. Usually a General Manager learns quickly the value of a baseball player’s on-base percentage. Meaning, a player’s value is derived from how often he gets on base. Hitting home runs isn’t the end all be all in baseball or in investing.
Simply put… investors who are constantly on the lookout for home run stocks are going to strike out more often. Investors looking for stocks with a greater certainty of smaller yet steady gains will rake in profits more consistently…
In my many years of experience, I’ve known many wealthy investors who are happy making 10% to 15% a year in the market. However, I have seen plenty of investors lose tons of money by constantly going for the home run.
No question… whether you’re an investment pro or a retail investor, it never hurts to pay attention to the basic principles of sound investing. Follow my three resolutions and you’ll be on your way to making money more consistently in the market.
Category: Stocks
