Investing is a complex subject. One cannot simply start studying investments and expect to do well in one month or even one year, although it might. Here lies the reason behind some of the biggest losses in the market. When you invest with or without experience, and you do well. It might give the wrong idea about investing, making you feel like a temporary genius. Making money, particularly in the stock market is not an easy task. Short-term gains for inexperienced investors can create a feeling of over-confidence, and this can be dangerous. More experienced investors will view their successes in a different way.
Investments are extremely connected with human behaviour and emotions. This is exceptionally true in the short-term. As Benjamin Graham put it:
As you progress through your investing journey, you may find that due to past experiences you develop investing beliefs that may or may not be correct. It might have to do with the fact that you only invest a certain amount of money, or in a specific index. These beliefs can have a tendency to make you superstitious. It is difficult to conduct an extremely detailed analysis of a business, without letting your past experiences influence your conclusions. This is one of the reasons investing is such a complex endeavour. Personally this is one of the reasons why it is so challenging and rewarding. The inner struggle we have to go through as investors, to analyze the bias in our own opinions and views, helps us develop our skills. To be humble is an important characteristic that allows us to learn and to question our predetermined conclusions.
In the investment world, there is no easy recipe for success. There is no checklist that you can go through for every investment idea, and take easy conclusions. There are principles that should be inplace, and you require knowledge to conduct a proper analysis. But every investment situation is different. That is why research is of the utmost importance. Every investment is a special case that should be considered individually, and requires good judgement and sound reasoning.
When investors reach this point they start feeling overwhelmed with the amount of choices, and usually lose focus. With so many stocks and indexes to choose from, they don’t even know where to start with. The answer is to start with what you know. Let’s say you work as a car salesman, you might have some insights into what car brand or model is currently the best selling. You will also have a sense of how many cars are being sold, or if the demand for cars is high or low. Focus on knowledge you already have. It is easier for a car salesman to analyze a car manufacturer than it is for someone that has not worked in the industry at all.
To be successful as an investor you need to be able to question your most strong beliefs. By doing so you will always be one step ahead of yourself. You would be surprised how incredibly common it is for investors to self sabotage themselves based on absurd highly held beliefs. If you are not willing to do that, investing will become an extremely hard and painful endeavour. You should always question your conclusions.
Let’s say you analyzed a company, and you feel the stock is undervalued and you should buy. Ask yourself how could I be wrong. By putting things in perspective, you will get a better sense of the decision you are about to take. Scrutinizing your analysis and decision, although painful at times can be very rewarding. When you take one side of a trade, always ask yourself what could the other side be thinking. What are their motivations to do the exact opposite of what I am doing.
Investors often rely too much on their portfolio performance to analyze how they are doing. The reality is that underperformance can happen for different reasons, and for long periods of time. This does not necessarily mean the investment thesis is flawed. What can happen is that investors turn to questioning their decisions and strategy, and they might feel compelled to change it based on the short-term performance of their holding.
This is particularly true for portfolios with fewer positions. Although diversification gives investors the sense of security, it can obviously hinder their performance in the long-term. Given the higher volatility of a concentrated portfolio. The short-term performance should not be considered the most important factor, when it comes to judging decisions.
To develop this kind of confidence in your analysis and strategy one needs to have strong will. By committing to scrutinizing not only your beliefs, but also your decisions and visions will ensure that your confidence grows over time. You should examine every little mistake or success. This will allow you to learn with all the decisions you make, and it is a common practice even for the most successful investors of our time.
HERE are 8 ways to find undervalued stocks
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