Investing Habits to Keep, Part 2

In Part 1 of our discussion, I explained why constantly reading as much as possible is a crucial part of every investor's education. As you work your way through lots of financial-information resources and annual reports, you'll eventually find companies that offer great investment appeal and merit  investment capital. But before you pull the trigger, make sure you do one thing. You've done the reading. Now you need to start writing.

If you can't write it down, you don't understand it
Remember when your English teachers made you write essay after essay? If you were hoping that a career in investing would take you away from such tasks, you and your portfolio might be in for a rude awakening.

We've all heard Warren Buffett say that before you act on an investment you're considering, you should be able to write your reasons down in a couple of sentences. The point is that if you can't easily express what the business does and how it makes money, then you should avoid it.

In short, writing out your investment thesis ensures that you understand the business, requires you to quantify why the investment makes sense at the current price, and prevents you from selling too early at the first sign of trouble.

So, do you understand it?
Buffett can easily express what interested him in Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) and Coca-Cola (NYSE: KO  ) . You should know how to do the same. Being able to write out your reasons for investing in a business demonstrates that you understand that business. If you understand it, you'll be able to base your investment on facts, and you'll have better confidence when you invest.

The same principle holds for valuation. If you can't value a business, you shouldn't be investing in it. And again, that's why you put pen to paper. You can value a business only when you know what it does and how it earns it profits. When you write out your investment thesis, you'll sort those things out, and you'll inevitably figure out whether the business is undervalued, fairly valued, or overvalued.

Ignore the noise
One of the most psychologically painful experiences for an investor is to sell a stock for a loss, only to see the price rocket up shortly afterwards. But by knowing your investment cold, you severely reduce the likelihood of jumping ship at the first sign of trouble. Analyst upgrades or downgrades won't easily sway you.

Again, the writing process will help you. It builds on itself. In addition to helping you determine the worthiness of an investment, it will also help you know when to sell. Sound analysis will tell you whether a stock is no longer undervalued, or whether something has happened that permanently reduces your stock's intrinsic value. If you take a loss here, that's OK. Your winners will still probably outnumber your losers, as long as you're making decisions based on sound analytical research.

Do it your way
All investors have their own unique investing process. We all comprehend points of data differently. What must be the same is that before you invest, you understand what you're getting yourself into. Buying what you understand, and getting it at a fair price, is always the goal, and maintaining good reading and writing habits regarding your investment decisions will help keep you focused.

Further Foolishness:

Read/Post Comments (0) | Recommend This Article (8)

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.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 567284, ~/Articles/ArticleHandler.aspx, 10/21/2016 10:03:59 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 48 minutes ago Sponsored by:
DOW 18,145.71 -16.64 -0.09%
S&P 500 2,141.16 -0.18 -0.01%
NASD 5,257.40 15.57 0.30%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

10/21/2016 4:00 PM
BRK-A $215600.00 Down -1375.00 -0.63%
Berkshire Hathaway… CAPS Rating: *****
BRK-B $143.60 Down -0.89 -0.62%
Berkshire Hathaway… CAPS Rating: *****
KO $42.13 Up +0.20 +0.48%
Coca-Cola CAPS Rating: ****