5 Keys to Investing Successfully in the Stock Market

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The stock market is an exciting place. You can buy an ownership stake in everything from fast-food restaurants to smartphone manufacturers and companies that build nuclear plants. Furthermore, you can invest in the United States, with companies that conduct their business in dollars, or in exotic markets abroad.

Investors really are spoiled for choice. But with the endless opportunities the stock market presents, and with the constant mainstream media focus on companies and investments, it's easy to get overwhelmed.

The good news is that if you follow some basic investing rules, you materially increase your odds of making good investment decisions that can lead to financial independence and peace of mind.

1. Invest only in what you know
Warren Buffett advocates for investing only in companies that you can understand. Seems logical, right? Yet there are many investors who put their money in companies with complex, hard-to-understand products and industry conditions.

That can work if you really understand the complexities of those companies, but the best thing to do is to invest in companies whose products you know and that you probably buy yourself. As Buffett says, stay in your circle of competence.

2. Buy quality companies and industry leaders
This is another Buffett-style no-brainer. Buy only companies that have a record of solid performance, such as consistently increasing revenues and earnings, and that put in a good operating performance during market downturns.

Buffett's "Big Four" come to mind here -- Berkshire Hathaway's cornerstone investments in Wells Fargo, American Express, Coca-Cola, and IBM. All of these companies are industry leaders with long operating histories and have done very well for Buffett: He actually further increased his ownership in each of the companies in 2013 according to information provided in his latest shareholder letter, buying additional shares of Wells Fargo and IBM while benefiting from share repurchases of Coca-Cola and American Express.

Over the long run, investors can expect to do reasonably well with industry leaders such as these.

3. Invest; don't speculate
This is a fine line but an important one. Investing requires investors to do their own research, weigh the pros and cons of an investment, and make an informed investment decision.

Speculators, on the other hand, try to forecast price movements and position themselves so that they can make a profit should their prediction come true. Trying to time the market is gambling and has nothing to do with investing.

4. Diversify
If you put all your eggs in one basket and you drop the basket, you've lost everything. Spread your investing dollars over multiple investments as well as asset classes to protect yourself from inconvenient surprises.

5. Take the time to regularly review your portfolio
Don't forget to review your portfolio once or twice a year to determine whether the investments still make sense for you and remain suitable for your long-term financial goals.

Monitoring investment performance is an essential step for every investor. Whether you're a small investor or a big one doesn't matter.

The Foolish bottom line
When you're embarking on a journey to achieve lasting investing success, start by sticking to some prudent investing principles. If you start there, you'll have already set yourself up for a promising investing career.

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  • Report this Comment On August 23, 2014, at 12:54 PM, Blackhawk wrote:

    I don't know......it seems everyone (now) associates Warren Buffet to their essays on how to invest etc. and repeats ad nausea!!!

    While the main principles still stay intact from WB there is another outlook that can be balanced with D & T Gardner's...........i.e. MF somewhat more speculative thinking.

    For an older investor like myself at this time of uncertainty is look at 60% stocks with 50% of them being high div yields and 40% in long term/international bonds ETFs

    Just my thoughts.......

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