If you have decided that investing is the route for you, there are a few basics that will enhance your ability to take advantage of Mr. Market. The most important one is this: Do your own work.
First, let me say that there are a lot of worthwhile resources available to investors. They provide the reader with wonderful starting points. After all, you have to generate your beginning ideas somewhere. But these resources are just tools. They help you get started.
If your goal is to surpass the average investor, however, then you really have no other choice but to roll up your sleeves and get started.
It's all about you
It is one thing for someone else to understand a business and pitch the idea to you, but that means nothing to you or your investment portfolio. Different investors have different goals at different times. The Warren Buffett of today, who invests in companies like Iron Mountain
When you start looking to fulfill your goals, remember that the best investment gems are usually waiting to be discovered, and are thus left ignored by the brains and media of Wall Street. This is a good thing, as the investor's goal is to get paid by doing his homework and not by taking on risk. There is no equity investment that is 100% free of risk. Your goal, however, is to get involved in situations where the odds weigh heavily in your favor. And then bet big.
Look at the bottom and not the top
Another reason to invest alone is that the crowd is always focusing on the Cinderella stocks of the day, such as companies like MGM Mirage
If you talk to analysts and all the other crowds that gather, the stocks on their lists are usually the ones with the highest degrees of optimism. Coincidentally, they also carry the highest levels of risk, as you will often end up buying at the top and selling at the bottom.
By acting alone, you will be able to 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, something that is rarely achieved if relying on crowd mentality. 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, the upside outweighed the possible loss of capital many times over.
Don't forget your circle
Of paramount importance in thinking independently is to remember to invest in only those situations that you completely and fully understand. Straying into untested waters without first understanding the underlying economics and potential risks will be costly.
By understanding your investments cold, you are less likely to be guided by emotional tendencies that tell you to sell a stock because the price has gone down by 20%, when nothing has happened to the underlying fundamentals of the business. The herd often likes to equate price volatility with risk, and you, thinking alone, will avoid such error.
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The Fool owns shares of Berkshire Hathaway, which is a Motley Fool Stock Advisor recommendation. American Express and Berkshire Hathaway are Motley Fool Inside Value recommendations. 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 and General Electric. The Fool has a disclosure policy.