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Smart Investor: 11 easy steps to become a successful investor

Citywire's Smart Investor columnist sets out his 11-point plan for anyone wanting to start investing in shares, or any other investments.


by Smart Investor on Nov 16, 2012 at 13:17

Smart Investor: 11 easy steps to become a successful investor

I recently wrote a piece on overcoming the novice investor's 10 big problems, where I offered solutions to common problems faced by private investors.

Following on from this, I thought it might be useful to list what I believe to be the 11 most important facets of being a successful private investor.

1. Find a way to become cold-hearted

The biggest failing among investors is a tendency to become either fearful or greedy. There is a strange obsession among many investors to want more of a company whose share price has gone up and less of a company whose share price has gone down.

This is not only quite unique to the investment world, but is also illogical. When markets fall, you should become greedy. When they rise, become fearful.

2. Acquire a basic knowledge of accounts

You do not need to be able to produce a set of accounts, but you should be able to understand a balance sheet, profit and loss, and cash flow statements. Furthermore, a small number of ratios such as return on equity, debt to equity and others should be understood and used to assess the quality of a company.

3. Learn to ignore everybody

The stock market is full of what Mr T would call ‘jibber jabber’. In other words, people talking nonsense. You must learn to base your investment decisions on facts and facts alone. This will help you to deal with share-price falls and help you to become less emotional about investing.

4. Study sectors and businesses

The constant reference to ‘economic moats’ in my articles is me trying to put across whether I feel a company has a competitive advantage.

In other words, does a company enjoy barriers to entry? Does it have a lower cost base, customer loyalty, or a unique product? Such analysis will not only give a good idea of whether a company is resilient, but will also provide an indication as to whether margins can be expanded or will come under pressure in future.

5. Do not check your portfolio frequently

If you bought a slice of a private business, say a newsagent, would you have it valued every day/week/month? Think of your investments as slices of businesses whose prices will fluctuate.

Sometimes they will go up, sometimes down, but the only thing that matters is the gain/loss when you come to sell them (if you ever do).

6. Become efficient

Many people say they lack the time to invest their own money. In most cases this is untrue: they believe they lack time because they are inefficient. They read the Financial Times, watch the news and obsess over whether they like a company’s products or not.

Put together a checklist and work through it without messing around.

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8 comments so far. Why not have your say?

John Bowers

Nov 16, 2012 at 14:26

I do not agree that you should not check your portfolio regularly. If you are holding individual companies, it is essential to check company anouncements daily. Otherwise you wake up to find that some misfortune has led to a 20% fall in the share price. Nowadays it seems that even the largest companies are prone to such volatility.

Obviously it pays to do as much research as possible. FT online is my favourite recourse since you can instantly check news and views on individual companies. But if you want a carefree existence, d'ont buy shares. Buy unit/investment trusts which minimise you losses.

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Geoff Downs

Nov 16, 2012 at 14:58

My tips for successful investing.

1. Keep Ben Bernanki as the Federal Reserve Chairman.

2. Err, same as 1.

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Tony Dimov

Nov 16, 2012 at 20:37

Buy wonderful business (stock) when the Marked is in the max pessimistic mood and hold the stock for long time. Investing in a mutual fund is a good idea but most of your money will go out of your pocket as fee and commissions.

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J Bewey

Nov 17, 2012 at 15:30

You should keep a daily eye on your holdings. So often the price of a share starts to drop by large %ages without any news in the public domain. The insiders know well before you do and trade on it. Insider dealing is supposed to be illegal but if you believe that you believe the Pope secretly believes in birth control! Checking on a weekly or monthly basis means you should not be invested in individual shares.

I have been investing since the early 90's and the only strategy that doesn't need a large amount of luck is £ cost averaging. I can look at my spreadsheets and see time and time again the spread of prices I bought a share at; and the glaring fact is the average price against the current price is where the profit is. Very often the current price is around where I bought the share at the greatest price despite all my research. Drip feeding in as prices go lower in line with the overall market, with regard to quality shares, will make the profit in the longer term. That and receipt of decent dividends along the way, whether re-invested or not makes the short term irrelevant.

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J M Turner

Nov 19, 2012 at 18:57

Can anybody tell me of a simple app or program which enables you to see how each of your share holdings you bought are doing ?? including Dividends etc?? Hence enabling you to look at how each one performs??

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Nov 19, 2012 at 19:14

Hi J M Turner,

Just log on to DIGITAL LOOK, and set up your portfolio.

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Nov 19, 2012 at 19:19

Hi J M Turner

Just log on to DIGITAL LOOK, and set up your portfolio on it.

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Nov 22, 2012 at 13:22

I second Digitallook. It's also useful in that you can easily set up alerts to send you emails for an RNS or specified prices (e.g. bid price greater than 99p).

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