If you've decided that investing is the route for you, a few basics will enhance your ability to take advantage of Mr. Market. Foremost among them: Do your own work.
There are many worthwhile resources available to investors, each providing readers with wonderful starting points. After all, you have to generate your beginning ideas somewhere. But these resources are just tools to help you get started. If you want to surpass the average investor, you'll have to start coming up with your own ideas.
It's all about you
Different investors have different goals at different times. The Warren Buffett of today, who invests via Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B) in companies like Goldman Sachs (NYSE:GS), Coca-Cola (NYSE:KO), and Wells Fargo (NYSE:WFC), can't pursue the same investments he did back in the 1950s and '60s.
To fulfill your goals, remember that the best investment gems are usually those still undiscovered -- or better yet, ignored -- by the brains and media of Wall Street. No stock investment is 100% free of risk. But if you can find stocks whose obscurity weights the odds heavily in your favor, and then bet big, you'll maximize your potential gain and minimize your potential pitfalls.
Look at the bottom, not the top
The Wall Street crowd tends to focus on the Cinderella stocks of the day -- companies like Las Vegas Sands (NYSE:LVS) or Citigroup (NYSE:C) that have recovered strongly from their March lows. Still, although many believe that these companies have put the worst behind them, buyers should heed Buffett's words: "You pay a high price for a cheery consensus." If anything happens to derail the recovery, it could spell disaster for investors who bought into these companies after they made their big rise. Just ask anyone who bought stock in Crocs at 10 times its current price.
The stocks most hotly pursued by analysts and the rest of the Wall Street herd usually enjoy the highest degrees of optimism. Coincidently, they also carry the highest levels of risk that you'll end up buying high and selling low.
By acting alone, you can focus on areas of the market currently unloved by the crowd, without any distracting influences. One of the key tenets of successful investing is being able to buy a stock at the maximum point of pessimism. If you're following the crowd, you'll rarely do so. Had he relied on consensus opinion, Buffett would have never bought American Express in the midst of the so-called salad oil scandal. As history proved, his upside outweighed the possible loss of capital many times over.
Don't forget your circle
Remember to invest only in situations that you completely understand. Unless you first understanding the underlying economics and potential risks, you could set yourself up for a costly mistake.
By understanding your investments cold, you are less likely to be guided by emotional tendencies. Fear won't drive you to sell a stock simply because the price has gone down by 20%, even when nothing has happened to the underlying fundamentals of the business. The herd often likes to equate price volatility with risk. By thinking for yourself, you can outsmart them -- and profit handsomely.
