10 Ways You Can Become a Better Investor

The stock market is an unforgiving beast. It can reward those who do their homework, and take remorselessly from those who blindly throw it money. Countless millions of investors feel they have the investing prowess to go against some of Wall Street's finest, only to eventually take it on the chin. It'd be foolish to think that you'll be successful all of the time, but I do have ten methods you can follow that should make you a better investor.

1. Avoid pack mentality
This might sound like a no-brainer, but it pays to think for yourself. Don't get me wrong -- it never hurts to pay attention when Warren Buffett tells you what he's buying, or take notes when David Einhorn tells you what's on his short list. But marching to the beat of your own drum could mean the difference between huge returns or hefty losses. Just because Sirius XM (Nasdaq: SIRI  ) is a popular play, doesn't mean it makes for a good investment. Sirius's technology might be found in many new cars, but I question how it will pay off more than $3 billion in debt when it has thus far struggled to maintain profitability.

2. Know your horizon
The next step is to establish your investment time horizon. Younger investors will have numerous decades to accumulate wealth, while baby boomers are preparing to live off their retirement nest egg. Knowing whether you're an active trader or a long-term investor is essential if you want to make your investing strategy as effective as possible.

3. Know your limits
Understand what level of risk you're willing to tolerate. For instance, Tesla Motors (Nasdaq: TSLA  ) has proven clean-energy technology. But the company has been unprofitable so far, and it has more questions than answers. Given that it's likely to be volatile in the years to come, I wouldn't recommend the stock to a baby boomer nearing retirement. But younger investors might want to be more aggressive, since time is on their side.

4. Understand what you own
It's imperative that you not only understand what the companies you own do, but why you bought them in the first place. For instance, I definitely wouldn't put any of my own money into shares of Krispy Kreme (NYSE: KKD  ) , even though I'm a big fan of their donuts. Krispy Kreme doomed itself by expanding beyond its financial means in 2004, and it's shuttered numerous stores in light of its crippling debt. The lesson: Don't just invest in what you know. Pick growing businesses in which to invest your hard-earned cash.

5. Accept that you're not perfect
This is absolutely the toughest suggestion to take to heart, because even I sometimes refuse to admit defeat, but minimizing your losses needs to go hand-in-hand with maximizing your gains. One of the worst losses I took came in August 2009, when I bet against the SPDR S&P 500 (NYSE: SPY  ) . It rallied along with the rest of the market, and it's now 90% above its 2009 lows. I continued to ride that loss upward, despite improving economic news. Remember not to let portfolio potholes become sinkholes.

6. Invest in increments
Once you've found that perfect company, remember to edge your toes into the water before you jump in headfirst. Investing in increments removes most of the "all-or-nothing" emotion, and keeps you from adding to losers which can burn a hole in your pocket. As an example, integrating streaming media with its traditional DVD mailing business took Netflix (Nasdaq: NFLX  ) years to accomplish, but its subsequent soaring subscriber growth has rewarded long-term shareholders with triple-digit gains.

7. Stop paying Uncle Sam
Although this may not always work perfectly, it pays to keep track of when you buy and sell stock. Short-term capital gains taxes can be as unpleasant as 35% for those in the highest tax bracket, while long-term capital gains taxes never eclipse 15% across any tax bracket. In the end, a profit is a profit, so you shouldn't hesitate to lock in gains. But taking your investment horizon and goals into account should help to determine whether holding for a longer duration might indeed save you money.

8. Pay yourself instead
Instead of giving your money to Uncle Sam, put it to work in companies that will pay you. Consumer giant Clorox (NYSE: CLX  ) has dozens of popular brands in its portfolio, including Glad and Brita, that provide financial stability during rough economic times. It also has a rock-solid dividend yielding 3.4%, which has provided dependable income over the years. Dividend-paying stocks have historically outperformed those which don't pay a dividend, so why not give yourself a raise?

9. Set clear goals
Sure, we'd all like a billion dollars, but setting clear and reachable expectations from our stock picks can help us determine the best time to sell. Often, when I'm purchasing a stock, I have a set level at which I aim to take profits. This level can change as the fundamentals of the stock change, but I always have a sell target in mind. So should you.

10. Invest in yourself
Some view paying for books or financial newsletters as a sign of weakness. On the contrary, investing in yourself is the smartest move you can make. The stock market is really just a never-ending sea of data that needs deciphering, and you shouldn't shortchange yourself when it comes to your retirement.

Is there something that you feel makes you a better investor that I've left out? Feel free to add your thoughts in the comments section!

Fool contributor Sean Williams does not own shares in any companies mentioned in this article. Though he's getting better at admitting defeat, he still remains a devout Detroit Lions fan. You can follow him on CAPS under the screen name TMFUltraLong. Netflix is a Motley Fool Stock Advisor selection. Clorox is a Motley Fool Income Investor recommendation. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (9) | Recommend This Article (18)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 27, 2011, at 11:18 AM, 67vair wrote:

    Gee, Motley Fool bashing Sirius again. What a surprise! Guess they shorted it and want it to go lower. Fools.

  • Report this Comment On January 27, 2011, at 11:41 AM, siriuslyrick wrote:

    Yep, that's the last "article" by Mr. Williams that I'll bother reading. The lack of understanding is almost as large as the volcano brewing under Yellowstone right now.

    http://www.benzinga.com/life/Travel/11/01/804560/could-the-w...

  • Report this Comment On January 27, 2011, at 11:49 AM, ItAintCool wrote:

    Sean Williams...looks for every opportunity to knock SIRI. Too bad he's been wrong about the stock for 2 years andnd continues to be. Can't even cite a link to his own articles knocking SIRI in the past because they're so poorly written. Full of emotional hyperbole and lack any logic. The debt he cites is not meant to be paid all at once and not due anytime soon. And all the credit rating companies have already given SIRI high marks and raised their credit rating for their ability to pay down their debt. When Sean Williams isn't knocking SIRI, he (and many at MF) are pumping Pandora for their upcoming IPO. One wonders what may be really behind his rhetoric.

    Sean doesn't want you to follow the pack, meanwhile the pack has been making up to a 3,200% return on SIRI. The pack has been making $ hand over fist on Netflix, Google and Apple. Take his advice at your own risk, and your own loss. You snooze, you lose.

  • Report this Comment On January 27, 2011, at 12:50 PM, rfaramir wrote:

    Excellent advice. Sell strategy is what I currently struggle with.

    Good even take on SIRI and TSLA. Good tech, but an investment is in the *business*, not just the tech. Making a business work out requires more than good tech, though that surely helps. Any SIRI posters have any constructive ideas on how they'll pay their debts?

  • Report this Comment On January 27, 2011, at 12:56 PM, TMFUltraLong wrote:

    ItAintCool,

    We've had this discussion before. Sirius has diluted shareholders to death, and unless you purchased the company in the past roughly 2 years, you're underwater. I could pick any stock out there and make it look like a great investment if I base my starting point at the low. Unfortunately most investors didn't get into Sirius at 5 cents. It has rallied from there, but it's still a LONG way from where it used to be.

    TMFUltraLong

  • Report this Comment On January 27, 2011, at 1:10 PM, TheDumbMoney wrote:

    With all due respect, I think the only ones demonstrating excessive emotion are those who want to marry SIRI. I have not carefully looked at the stock and have no opinion on it going forward from here, but the tone of the comments, combined with the fact that TMFUltra's SIRI comment was -- multiple times -- singled out of an article with lots of other excellent generalist advice, are together enough to know I am not witnessing the result of totally rational thought.

    Personally, I wish I could always be as great a genius as I am when I'm wallowing in hindsight bias, or, alternatively, when blind luck causes my totally speculative bets (on bankrupt companies that are then saved by angels I knew nothing about when I purchased the stock.) to succeed. I particularly like to talk about such blind luck when my other nine totally speculative bets (except, for most SIRI buyers that I have seen, LVS) have long since gone to zero.

  • Report this Comment On January 27, 2011, at 1:29 PM, ItAintCool wrote:

    TMFUltraLong

    Not a lot investors got into SIRI at .5 cents (I got in at .10 cents, but that was after I originally bought in at $5.90 and any losses I had incurred have long since disappeared when the stock hit .30), but a lot of investors got into the company over the last 2 years, and I'm sure a lot of them dollar cost averaged themselves into a tidy profit.

    You didn't even have to get into SIRI 2 years ago to make money on the stock. How about 2 months ago? (30% gain) How about 6 months ago? (60% gain) How about 1 year ago? (150% gain)?

    And I agree it's far from the price I originally paid for it. But there's nothing that indicates it can't get to those prices either. The company starts making a profit and the bashers start to say it's the end of the line, but they can't explain why. Note; these are the same bashers who said it would never get over $1.00, but now they can't say that anymore. And I'm willing to take bets that by end of 2011 we'll be around $2.75 to $3.00, if not better.

  • Report this Comment On January 27, 2011, at 2:49 PM, UBMProject wrote:

    Good List. You should include that investing in yourself like school courses and keeping updated with new found trends helps immensely as well.

    @67vair...bwahaha

  • Report this Comment On January 28, 2011, at 3:44 PM, Merton123 wrote:

    I like the advice given in the article. Benjamin Graham said it best "that success in investing depends upon the investor having a rational objective basis in the buying and selling of securities". Warren Buffet stated that one should buy a stock with the idea that you would have no problems if the stock market closed for five years - my read is to make sure that you stock pays a nice dividend and has good prospects of raising it if the stock market is going to be theoretically closed for five years.

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