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
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
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.
Warren Buffett is buying stocks, and we know why. Find out in this article from Morgan Housel whether you should follow the Oracle or walk your own path.
The Fool owns shares of Berkshire Hathaway, which is a Motley Fool Inside Value recommendation and a Motley Fool Stock Advisor recommendation. Berkshire Hathaway, American Express, and Coca-Cola are Motley Fool Inside Value recommendations. Coca-Cola is a Motley Fool Income Investor recommendation. Try any of our Foolish newsletters today, free for 30 days.
This article, written by Sham Gad, was published Nov. 5, 2007. It has been updated by Dan Caplinger, who owns shares of Berkshire Hathaway. The Fool has a disclosure policy.