Today I am looking at three investing must do’s, but this time I am taking a less conventional approach.
Three investing must do’s
The three Rs
First must do, is actually three things. The three Rs of investing: research, research and research.
Buying a share because you read an article in Investors Chronicle tipping it, isn’t enough. By all means, let that pique your interest, but really read around the subject. Read up about the sector, and if relevant, try the product.
Linked to that, invest in what you know. The markets are very good at pricing in the obvious.
Let me give you an example. Suppose you are considering investing in either Next or Marks and Spencer. Do your research, but then take your research to another level, think as a customer, ask your family to do the same. Last week, I needed to buy a shirt, and there is a Next and Marks & Spencer next to each other, in an out of town shopping centre, near where I live. I treated this as an experiment. Well, Next won. I bought the shirt, and very nice it is too, in Next. On its own, that’s not a conclusive reason to buy Next shares, but it does provide evidence. The markets are not so good at thinking like a customer.
Not today, thank you
Second must do, invest occasionally.
Warren Buffett diversifies his portfolio but only invests occasionally, on the rare occasions when an opportunity comes along. He likens it to baseball. A good batter waits patiently for the ball that has been pitched just right. I don’t know much about baseball, but this approach is analogies to a good batsmen in cricket — a part of the skill is in recognising which balls to try and hit for a ‘four’ or a ‘six’ and which balls to leave or play defensively.
Bide your time, invest when there is a kind of alignment in your investing criteria, even if that alignment occurs very rarely.
But that’s not logical Captain
Third must do relates to emotion: cast emotion to one side. We are all biased, there are complex reasons why we hold certain beliefs, why we do and say certain things — and logic rarely forms part of these reasons. For investing, that won’t do. Try and think like Mr Spock from Star Trek. And never, never hold on to a share for emotional reasons, treat all the shares in your existing portfolio as if they are new shares that you are considering. If you wouldn’t buy them, why are you holding them?
Look beyond confirmation bias, recency bias, the availability heuristic, look beyond anchoring and don’t fall victim to the endowment effect. I will return to these biases, or heuristics, and explain them, in a future article.
These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees