Successful investing comes from learning the basics and refining your skills with experience. In this series of articles we look at the basics of successful investing. In the first article in this series, Basics of Successful Investing I, we noted that the first thing to do is put your financial house in order and then decide why you are investing and how much capital you are willing to put aside in safe investments and how much you are willing to risk in more aggressive investments. In Basics of Successful Investing II we suggested that you start out by investing in companies that produce products and services with which you are familiar. And, if you want to pick other stocks you need to learn what the company does and how it makes its money. Most importantly we suggested that investors learn how to use the concept of intrinsic value in order to decide if a stock is likely to be a profitable investment or not. In this article we consider a practical approach to investing by a person who has a full time job, family and other obligations. In other words what are the basics of successful investing if you have some money but the vast majority of your time is devoted to the rest of your life.
Picking Five Stocks
It is a good rule of thumb to limit your investments to five stocks, especially if you want to buy stocks when they are cheap and get out if they become overpriced. Likewise you may have had the good fortune to have investing in an exchange traded fund that tracks the S&P 500 and have seen your investment rise in value with the current market rally. But, there is a lot of talk about a possible market correction as the currency rally has gone one for five and a half year with only one pullback of ten percent. There are times when you have not made a profit until you have taken a profit and for the busy person five stocks are enough to watch. If you are busy with the rest of your life you only have a certain amount of time to follow your investments. And following your investments is essential. A successful investor checks his stock portfolio once a week at the minimum. This means checking stock prices but also news that is pertinent to the stock in question. When you receive quarterly and yearly financial reports you need to read them and understand when management is saying about prospects for the future.
Margin of Safety versus Story Stocks
A successful investor once noted that many investors want a good management team in place for the stocks that they buy. His opinion was that he wanted a company with such strong market presence and such a strong brand name that even incompetent management could not ruin things. That is to say, there is a margin of safety in buying into a brand name like Coca Cola. And there are story stocks. This is often the case with a formerly mismanaged company that has new management. Read their reports and there is always a story about how the new team is going to whip the company back into shape. Then continue to follow the stock price, financials and the story. If the story turns out to be the truth you will be making money and if the story is just a story you will see losses and it will time to get out.
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