Investing fundamentals are the bedrock upon which all successful investors build their strategies. But too often new investors are unaware of some vitally important basics. They get caught up in the excitement of what they’re doing, unaware that they’re only one bad call away from losing a lot of money. I know, because I’ve been there.
News is behind the curve
It’s critical to be informed about current events and what’s going on in the world, but only up to a point. The problem with paying too much attention to the news is that it can lead me to invest reactively rather than strategically, putting me behind the curve.
One of the worst blunders I ever made was purchasing stock in a firm that had recently hit the headlines because its stock price had skyrocketed. Shortly after I did, the price plummeted which was, once again, all over the news. I panicked and sold, only to watch the shares rebound in price. The whole ordeal just raised my cortisol levels and cost me money.
Nowadays, I listen to the news, but I don’t let it drive my decisions.
Investing is a marathon, not a sprint
Two powerful emotions, fear and greed, have the ability to influence everyone in the world.
When the market falls, fear motivates us to sell, while greed pushes us to buy when prices are at all-time highs. But as shown above, I might as well burn my money if I don’t keep my emotions in check.
What I’ve learned to keep in mind is that investing isn’t about becoming a millionaire overnight. It’s all about long-term wealth creation.
Buying stocks and virtually forgetting about them was the smartest thing I ever did. Prices will continue to fluctuate in utterly unexpected ways for years, but I realised that devoting my days to watching them would just weaken my resolve.
Research the business
The fundamental investing rule I now have is to research a business. It takes little time or effort and that research might be the difference between a wonderful return and a huge loss. Of course, I need to know what I’m looking for, so I ask myself four key questions.
- Does the business provide a product or service?
- Is it costly to operate?
- Does the company have a competitive advantage over similar businesses?
- What’s the profit margin and does it have a lot of debt?
Most of these questions can be addressed by reviewing a company’s financial statements. If I can’t find satisfactory answers, I usually decide it’s not worth the risk.
No one’s making me swing
There isn’t a timeframe to any of this. Investing icon Warren Buffett once compared picking stocks to batting in a baseball game. Bu there’s one important distinction: there’s no one making me swing. This means I can truly think about chances that comes my way and don’t have to actif I’m not 100% sure it’s a smart bet. Ok, I’ve missed out on some excellent investments, but that’s not a problem. There will always be more chances, more opportunities. And when it comes to my hard-earned cash, I’ve learned it’s better to be cautious.
All investment entails risk, but by focusing on these fundamentals, I’ve stopped making the kind of costly mistake I mentioned above.
James Reynolds has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
