Long-Term Investor
Time and time again, investors take profits by selling their appreciated investments, but they hold onto stocks that have declined in hopes of a rebound. If an investor doesn't know when it's time to let go of hopeless stocks, he or she can, in the worst-case scenario, see the stock sink to the point where it is almost worthless. Of course, the idea of holding onto high-quality investments while selling the poor ones is great in theory, but hard to put into practice. Recognizing your losers is hard because it's also an acknowledgment of your mistake. But it's important to be honest when you realize that a stock is not performing as well as you expected it to. Don't be afraid to swallow your pride and move on before your losses become even greater. In both cases, the point is to judge companies on their merits according to your research. In each situation, you still have to decide whether a price justifies future potential. Just remember not to let your fears limit your returns or inflate your losses.
2) Don't chase the "hot tip"
Whether the tip comes from your brother, cousin, neighbor or even broker, no one can ever guarantee what a stock will do. When you make an investment, it's important you know the reasons for doing so: do your own research and analysis of any company before you even consider investing your hard earned money. Relying on a tidbit of information from someone else is not only an attempt at taking the easy way out, it is as good as gambling away your money. Sure, with some luck, tips may sometimes pan out. But they will never make you an informed investor, which is what you need to be to be successful in the long run.
3) Don't sweat the small stuff
As a long-term investor, you shouldn't panic when your investments experience short-term movements. When tracking the activities of your investments, you should look at the big picture. Remember to be confident in the quality of your investments rather than nervous about the inevitable volatility of the short term. Also, don't overemphasize the few cents difference you might save from using a limit versus market order.
4) Resist the lure of penny stocks
5) Pick a strategy and stick with it
Different people use different methods to pick stocks and fulfill investing goals. There are many ways to be successful and no one strategy is inherently better than any other. However, once you find your style, stick with it, the key to sucess is discipline. An investor who flounders between different stock-picking strategies will probably experience the worst, rather than the best, of each. Constantly switching strategies effectively makes you a market timer, and this is definitely territory most investors should avoid. Take Warren Buffett's actions during the dotcom boom of the late '90s as an example. Buffett's value-oriented strategy had worked for him for decades, and - despite criticism from the media - it prevented him from getting sucked into tech start ups that had no earnings and eventually crashed.
6) Focus on the future
The tough part about investing is that we are trying to make informed decisions based on things that are yet to happen. It's important to keep in mind that even though we use past data as an indication of things to come, it's what happens in the future that matters most. The point is to base a decision on future potential rather than on what has already happened in the past.
7) Investors adopt a long-term perspective
Large short-term profits can often entice those who are new to the market. But adopting a long-term horizon and dismissing the "get in, get out and make a killing" mentality is a must for any investor. This doesn't mean that it's impossible to make money by actively trading in the short term. But, as we already mentioned, investing and trading are very different ways of making gains from the market. Trading involves very different risks that buy-and-hold investors don't experience. As such, active trading requires certain specialized skills. Neither investing style is necessarily better than the other - both have their pros and cons. But active trading can be wrong for someone without the appropriate time, financial resources, education and desire. Most people don't fit into this category.
8) Be open-minded when selecting companies
Many great companies are household names, but many good investments are not household names (and vice versa). Thousands of smaller companies have the potential to turn into the large blue chips of tomorrow. This is not to suggest that you should devote your entire portfolio to small-cap stocks. Rather, understand that there are many great companies beyond those on the main boards and that by neglecting all these lesser-known companies, you could also be neglecting some of the biggest gains.
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