Investing in stocks is simple, but far from easy.
Conceptually, most people intuitively understand investing -- you exchange your money today for a piece of a company that will hopefully earn you more money over the years to come. And thanks to discount brokers like TradeStation (Nasdaq: TRAD ) and larger firms like Bank of America (NYSE: BAC ) , the execution is easier than it's ever been.
But actually doing it "right" and being successful over the long term, well, that can be another story completely. Some folks -- such as Vanguard's John Bogle -- think that most investors are better off skipping individual stocks altogether and opting for a low-cost index fund.
Meanwhile, we get quips from Berkshire Hathaway's Warren Buffett like "be fearful when others are greedy and be greedy when others are fearful" and opposing thoughts like "the trend is your friend" from trader-types. Enter the head-scratching.
Having a solid grounding is always a must for anyone who wants to be a successful investor, but with today's markets crazier than a shouting match between John Malkovich and Gary Busey, it's more important than ever. So whether you're a newbie to investing or a seasoned vet, here are three tips to help you make sure you're investing Foolishly and not just foolishly.
1. Know thyself, Fool!
There are few easier ways to land yourself in an investing pickle than to not have a good idea of where you stand when it comes to putting money into the market. This is particularly important because there isn't one right way to succeed -- Buffett, George Soros, and James Simons have all been tremendously successful, but each has had a very different approach.
How do you approach the market? Are you more of a speculator who's looking to capture the movements -- often short term -- of a stock's price? Or are you more of an investor, looking at the nuts and bolts of the underlying business and hoping to profit from its prosperity?
Forget the connotations of the words "investor" and "speculator" for a moment and honestly figure out how you approach your picks. You may well be on the right track by plunking down money for shares of EMC (NYSE: EMC ) because of the potential growth from cloud computing, or picking up some UnitedHealth Group (NYSE: UNH ) because you think it will benefit from health-care reform.
However, you don't want to shoot yourself in the foot by looking at those investments with the eyes of a speculator and selling just because the stock price has moved against you.
2. If everyone else jumped off a cliff ...
I think most of us are familiar with this fantastic bit of motherly logic. The idea is that just because everyone else is doing something that appears to be misguided, doesn't mean that we have to follow along. This is particularly true of investing, where the focus on short-term results often causes investors to act like a herd of crazed lemmings.
One of the best examples of this that I can think of is the heat that Buffett took back in the late '90s for not jumping on the tech bandwagon. While most investors out there -- institutional and retail alike -- were raking in gains by betting on stocks like Yahoo! (Nasdaq: YHOO ) and Qualcomm (Nasdaq: QCOM ) , Buffett hung onto "boring" long-term holdings like Nike (NYSE: NKE ) and listened to investing rookies say that his style was a relic. At this point I think we all know how it worked out for the folks that went crazy over tech stocks.
Keeping a sober, independent view when it comes to the stock market can be one of the hardest things to do, but it can often help you avoid the cliff that the rest of the lemmings are preparing to march off of.
3. Tips are for waiters
When I started writing for The Motley Fool, I figured I would forever be running into people who would want stock tips from me. In fact, it's been quite the opposite -- most of the folks who want to talk stocks have tips for me!
Of course, it's after hearing many of these tips -- which often amount to something like "my uncle thinks XYZ is poised to break out!" -- that I realized the wisdom of Jesse Livermore's supposed admonition that tips are for waiters.
Watching Jim Cramer scream out a boatload of tickers or jawing about stocks with friends can be fun, but when it comes to actually plunking down hard-earned money to buy stock, be sure to have your own thinking behind the purchase. A good way to do this is to write down the reasons for your investment. This doesn't have to be a doctoral dissertation, but it ensures that you're going on more than "Bob at the gym said it was a sure thing."
Putting it to practice
Every investment you make -- or decide not to make -- is more practice under your belt. Just like anything else, the more practice you get, the better you get -- provided, of course, that it's good practice.
Making sure that these three items are baked into your decision-making can help you get the most out of your investments and become a better investor. To recap, what we're looking for is:
- Know what kind of an investor you are and make sure your investments are consistent with that.
- Think independently and avoid becoming a market lemming.
- A stock tip can sometimes point you in the right direction, but always make sure to do your own research and have a good reason for buying a stock.
You can certainly take off now and put these ideas to work on your own, but sometimes bringing the right coach into the equation can help you progress even faster. The advisors at the Motley Fool Hidden Gems newsletter are all seasoned investors that I see putting these ideas to practice all the time.
With a subscription to Hidden Gems, you not only get stock recommendations from these stock market vets, but you get their thought process and philosophy on investing. And you can check out exactly what I'm talking about by taking a free 30-day trial of the newsletter.
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This article was originally published on April 29, 2009. It has been updated.
Fool contributor Matt Koppenheffer owns shares of Berkshire Hathaway and Bank of America. Berkshire Hathaway and UnitedHealth Group are Motley Fool Stock Advisor recommendations. Berkshire Hathaway and UnitedHealth Group are Inside Value picks. The Fool owns shares of Berkshire Hathaway and UnitedHealth Group. The Fool's disclosure policy loved that computer game about lemmings; whatever happened to that?