Investors new and old can benefit from the experience of investment pros. More ways are available to tap into the expertise of other investors. Many investors have improved their investment returns by reading the annual letters of Berkshire Hathaway to cull the investment advice of Warren Buffet.
The following advice from leading investors have worked so well for their adherents that they have become truisms of investing.
Invest in What You Know – Among all the investment truisms coined by Peter Lynch, the star mutual fund manager of Fidelity’s Magellan Fund from 1977-1990, this is the most famous. The best way to find undervalued stocks is to invest in businesses you know and understand. This personal knowledge is the most important investing edge you have. Knowing the product quality, business cycle, and competitive standing of a company will help you make more timely decisions. Lynch took his own advice one step further. He is famous for a visit to Apple Computers in which he asked Apple’s senior management if they would stick with what they know or go off and do something they “don’t understand.” By hanging out with people who really knew their stuff, Lynch earned a 29% return for the Magellan Fund over 13 years.
Buy Dividend Stocks – The stock of Tribune Media Company (NASDAQ: TRCO) is trading at 59.19 and paying a dividend of 26.92 per share, a hefty 45.24% dividend yield. While most dividend yields are considerably less, even if a stock’s value is falling, dividend paying stocks provide the opportunity to enjoy an income stream. Dividend stocks make dividend payments even when the stock does not rise, providing investors with passive income. Singapore had the highest dividend yield in Asia in 2014, at 3.31%. Reinvest your dividends.
Create a Diversified Portfolio – A well-diversified portfolio has stocks, bonds, and cash. You may also want to dabble in currencies and commodities. Your balanced portfolio should reflect your risk-reward profile. Each investment class should also be diversified. Index funds are a good way to diversify stock exposure across cyclical, defensive and other classes. Historically, index funds have outperformed any efforts of investors to actively cobble together a similar portfolio. Bond funds will help to smooth out returns during volatile periods.
When to Buy
“Timing is everything” is the key to buying and selling stocks, and the truism of every successful investor and trader.
– To reduce market risk, spread your initial buying over a period of time.
– Buy at market bottoms – Portfolios that reinvest at market bottoms perform better longer term. “Let your winners run” and cash in some losing stock from time to time to fund opportunistic reinvestments.
– Buy in gradually rising markets – A fast rising stock may plateau as soon as you jump in. A gradually rising stock is more likely to have more upside.
Look for rising volume – “Follow the herd,” but only if your own analysis supports the move. If volume is rising, the stock is more likely to rise.
Check the moving average – Look for a rising moving average that is above the yearly average. Historically, stocks whose moving averages are rising over a shorter period of time – 3 to 5 days – have performed better.
Avoid Volatile Stocks – Day traders love volatility. The rest of us should avoid it. In a volatile market when the risk of losses is much higher is the time to exercise discipline and avoid trading on emotion. “Do not sacrifice long-term growth for short-term gains.”
When to Sell
Sell when you hit your price target – Trade stocks applying discipline not emotion. While you may lose some upside, longer term your performance will be higher. Value stocks are bought at a discount to the estimated value. Establish a selling range, which is often set for when the stock hits its market value.
“Hold onto the winners” – Sell losing stocks not winning stocks to improve your long-term performance and reduce your tax bill. You will free up money to invest in a more promising stock. If you record why the stock did not pan out, you will avoid repeating the same mistake in the future.
Watch for declining fundamentals – If revenues or earnings are falling, something is changing in the fundamental business. Narrowing profit margins may reflect rising costs or declining sales. If the cash position is declining investigate why? How is cash being reinvested?
Sell when a stock moves below its moving average.
Do not sell often – “Buy and hold.” Active traders risk losing their gains in trading fees.
And never stop following the investment winners. The hottest trend in investing is following the top traders on social trading sites. TradeHero, the most popular social trading app, makes the portfolio of top traders and their trading moves transparent. Virtual currency allows you to trade on your own account and try to replicate the pros.
Whether trading virtually or for real, review and red-adjust your portfolio at least once a year. Review sectors that are not performing well, record and learn from what went wrong, and re-allocate funds to sectors that are doing well.
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