Why can't you be the country's next great investor?
It's not a rhetorical question. What, you're not qualified? Please. Peter Lynch was hired as an intern at Fidelity after working as the company president's golf caddy. Lynch was handed the fund that would make him famous, Fidelity Magellan, because it was a dog of a fund at the time with only $18 million in assets.
Berkshire Hathaway (NYSE: BRK-B) was a struggling textiles company when Warren Buffett stepped up in the 1960s, transforming it into a holding company for private and public enterprises. Yes, Buffett had a brilliant mind and had already demonstrated tremendous returns in his pre-Berkshire partnership, but it just goes to show that success can come from unlikely places.
Even if you argue that investing is what Lynch and Buffett do (or did) for a living, it didn't always start that way. Point being: You don't need pedigree papers to stand out among your fellow investors.
You're not successful so far? Oh, please. Everyone makes investing mistakes. Lynch was inspired by retail concepts that often went the wrong way. No wonder he wrote, "Six out of ten is all it takes to produce an enviable record on Wall Street," in his classic, One Up on Wall Street. Buffett took a gamble and lost on footwear maker Dexter, and even he, the Oracle of Omaha, questioned his move into the airline sector, despite walking out with a profit.
If you're not the inspirational type, I'll put down the pompoms and be practical. While you don't need an immaculate track record to make a difference on Wall Street, you do need a consistent philosophy, a sense of perspective (i.e., that four out of every ten picks may not work out as you'd thought), and the discipline to stick to your guns.
To that end, I have three tips to help make you a better investor in the year ahead. Maybe you won't be Lynch- or Buffett-like, but, hey -- there's a reason every kid on the blacktop emulates Kobe Bryant.
1. Embrace the humblers
Some of the easiest market calls are merely a matter of finding stocks that make Wall Street analysts come off as serial underachievers. Intuitive Surgical (Nasdaq: ISRG) has beaten the market's profit targets for 22 consecutive quarters. How many bears have been burned, betting against a hot company under the assumption that every streak has to end sometime? How many ordinary investors have become brilliant ones simply by riding that trend?
I know a few. They're Rule Breakers subscribers, and they were tipped off to Intuitive Surgical's growth three years ago. The surgical robotics company was catching on with hospitals, having obliterated Wall Street earnings projections every quarter since the end of 2002. Intuitive is likely to prove itself mortal one day. Until then, Rule Breakers readers will have no problem enjoying a stock that has soared nearly sixfold over the past three years.
2. Let your winners run
Maximizing gains and limiting losses are indisputable keys to amassing great market returns. The problem is that few people can master both. If you've got a trigger finger when your stocks turn lower, odds are that you won't be patient enough to see your winners through. If you can sway yourself into holding a stock for the long haul, you may also be tempted to stick to your losers under the assumption that they will bounce back. Buffett, for instance, has said that his ideal holding period is "forever."
Sell only if the story has changed. Some of the market's biggest winners, like Apple (Nasdaq: AAPL) and Hansen Natural (Nasdaq: HANS), have had wild ups and down, despite maintaining stellar fundamentals. If you bolted during a downswing, you'd be kicking yourself after the eventual recovery.
In other words, letting your winners run requires a long enough leash to give them the freedom to wander -- as long as they're heading in the right direction.
3. Bet on the familiar
Some of Buffett's biggest victories came from the insurance sector. Lynch found his hottest stocks by taking his wife and children to the mall. If there is a sector you're comfortable with, that's where you'll find your best investments.
It makes sense. If it's an industry you know well, you'll be able to spot trends early. I've been tracking the Internet sector since the dial-up days, so it didn't surprise me when I scored with Baidu.com (Nasdaq: BIDU) -- a market-thumping Rule Breakers recommendation -- two years ago, and with Netflix (Nasdaq: NFLX) in my own portfolio six years ago.
This doesn't mean that a portfolio should consist exclusively of stocks from a particular sector. Diversification is important. However, never lose sight that your best stocks will likely be the ones that you know better than most fellow investors do.
You take it from here
These three guidelines should be enough to point you in the right direction. A solid foundation supports all good investors as they create their own unique market identity.
This doesn't mean that great investors are islands. Buffett had the luxury of learning under Benjamin Graham, and his friend and colleague Charlie Munger is an investing legend in his own right. Lynch had the support of teams of analysts and fellow Fidelity fund managers (although the fund's meandering ways since his departure prove that you can have too many cooks in the kitchen).
You? Well, the Rule Breakers community is there for you, offering the kind of perpetual online support that Buffett or Lynch lacked when they were learning the ropes.
Whether it's a matter of mulling over stock ideas on the civilized discussion boards, or leaning on the monthly stock recommendations, I'll make it my fourth tip for you -- you can try it free with a 30-day trial subscription offer.
I see big things in your future. Now you need to see it too.
Longtime Fool contributor Rick Munarriz realizes that turning off your monitor to see the next great investor may depend on the actual glare in your screen. He owns shares in Netflix. Baidu and Intuitive Surgical are Rule Breakers recommendations. Netflix, Apple, and Berkshire Hathaway are Stock Advisor selections. Berkshire Hathaway is also an Inside Value stock pick, and The Motley Fool owns shares of Berkshire Hathaway. The Fool has a disclosure policy.
