I have a theory that most educated people with a basic grasp on mathematics could learn how to find solid investments in the sharemarket after just a week of study with someone experienced. However, I also believe that ‘finding solid investments’ is only about 20-30% of the game of sharemarket investing. The other 70-80% I believe is made up of learning how to value a company without bias and building up a level of control over your own emotions and psychology. So, you’d be able to pick solid companies to invest in, but then you might pay too much or get too greedy or fearful – which can quickly turn a solid company into a poor investment. Here’s a few tricks I use to help me to be a better investor and avoid making these mistakes.
Do Not Try To Predict The Sharemarkets Direction
A synapse is a junction between two nerve cells in the brain where impulses pass via a neurotransmitter. This is how our brain constantly fires and helps us to make decisions, by using 100 trillion of these synapses (Scientists are not completely sure on this number yet, some thinking it could even be as high as 1000 trillion). To put this 100 trillion into perspective, consider that the WHOLE world wide web is only just now getting to the computing power of ONE brain. If you count each clickable link/button (synapse) on every website connected to the internet around the world, it is now just getting somewhere close to 100 trillion. Astounding isn’t it!
So where am I going with this? The markets from day to day move based on the collective information available and the emotional responses of every active investor. These emotional responses being based on the multitude of options that each investors 100 trillion synapses may compute out. All of the investors in the markets times 100 trillion synapses equals a multitude of differing responses. Accurately and consistently working out which direction this web of potentials will send a market is just not something I believe any given person, or computer algorithm for that matter, can accurately work out. And I am yet to find an example that proves this wrong, so I don’t waste my time trying to do it.
Don’t Change Strategy
Whether the market is going up or down my strategy doesn’t change. My portfolio usually looks better on paper when the sharemarket is going up, but there are also usually less buy opportunities for me to take advantage of. On the flip side, when the market goes down my portfolio usually looks worse on paper, but there are usually more buy opportunities for me to take advantage of. There are pro’s and con’s for both directions, but either way as a long-term investor I still don’t change my strategy. I just keep searching for great companies at fair-to-cheap prices or companies loaded up with assets that are trading at a decent discount to the net worth of those assets.
What I DON’T do is try to chase prices up and down with the market and try to guess which way they might go tomorrow or the day after – remember 100 trillion synapses per investor.
Use A Checklist
One of my faults as an investor has been getting too excited to own a company or not wanting to miss out on an opportunity. So to help me avoid these faults becoming actually mistakes I use a solid Checklist to keep me in check before I make any investments. When complete my Checklist is usually about 30 pages for each company and covers everything from financials, competitive advantages, management, valuation and more. By not allowing myself to make an investment until a Checklist has been completed I force myself to slow down and I also give myself more confidence in my investments by learning about each individual company in more depth. Without a Checklist I have found it is just too easy to ‘push that button.’
Don’t Get Worried When Investments Go Down
Nearly every time I buy an investment it goes down initially and often I am actually hoping it will. As I mentioned above, as a companies share price goes down it provides me with more opportunities to build a larger holding in that company at ever cheaper prices. Of course I would love to be able to have a crystal ball, know when each company is at it’s low point and make my investment then, but remember 100 trillion synapses per investor doesn’t allow for this.
So I simply buy when I believe a company is cheap and keep buying if it gets cheaper. I do this until it increases in price again or I have reached a portfolio limit that I am comfortable with for that specific company.
Practice Time Away From The Sharemarket
Early on when I began investing I decided I wanted to go travel the world for a couple of years. Back then I didn’t have a laptop or smart phone so all I did was check my portfolio from time to time in internet cafes. Since I had originally done my homework on each investment and bought them at prices I believed were cheap all I needed to do was check that no fundamental changes had taken place within each company from time to time and simply let the management of each company worry about everything else. When I got back home 19 months later it turned out that my portfolio had actually increased by more than I had spent travelling.
It is too easy to get caught up in tracking the sharemarket day-to-day and by doing this I have found you are also more inclined to make rushed decisions based on fear or greed. By getting away from or simply stepping back from the daily market updates from time to time you can often gain more clarity and focus back on the work that really matters for an investor – studying the fundamentals of individual companies, as opposed to forever reacting to the chaotic responses of the sharemarkets.
The sharemarket can be a crazy, chaotic and dangerous place if you let it be, but I have found that once you set yourself some measured rules and practices it can also become a fascinating and useful tool for learning about the world, studying human nature and compounding your savings to keep in front of inflation. By keeping these 5 tricks up my sleeve, for me at least the sharemarket has been more of the later than the former.
Enjoy the ride!