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Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.
Have a goal
Knowing why you want to invest and how much time you have to hit that target is very important if you want to be a great investor. Let’s say you want to have enough money to pay your daughter’s university fees in five years’ time. You may wish to consider investing in a more cautious stock or fund as it would be awful if you risked all the money on a racy technology stock which didn’t perform as expected. No-one wants to invest and then find out they’ve got less than when they started at the point when the education bill needs to be paid.
Have a style
Having a plan will help to decide what kind of investor you want to be and the kinds of asset classes, instruments and platform providers make the most sense for you. ‘Traders’ tend to take short-term positions aiming to profit from changes in investor sentiment and specific market events. ‘Investors’ make longer term investments and focus more on the underlying business performance of a listed company.
Have an edge
Buying or selling a stock is described as an 'arrogant act' by respected US investor Seth Klarman of investment house Baupost. When one investor buys shares from another, they are doing so on the assumption that the person selling it to them is making a mistake – and that the value of the stock will go up. The seller equally believes they are getting a good deal and the price will fall further. Having an edge in this exchange requires an investor to have a very good reason why they are right and the market is wrong.
Focus on cash flow and harvest dividends
Over time, stock prices should respond to a company’s future ability to return money to its shareholders. Cash flow and dividends are the key mechanisms for a business to earn money and provide shareholders with rewards. Forming an opinion on how much cash flow and dividends a company can deliver is key to achieving long-term investment performance.
Invest with a margin of safety
Buying a dollar for 50 cents is the ultimate goal for investors. Paying less for something than it is actually worth could turn out a brilliant move over time. Ben Graham, the late US investor who coined the term ‘margin of safety’ once said ‘operations for profit should be based not on optimism but arithmetic’. Try to make investment decisions based on facts rather than emotion and invest with a wide margin of safety where possible.
This article is provided by Shares Magazine. Shares publishes information and ideas which are of interest to investors. It does not provide advice in relation to investments or any other financial matters and does not guarantee the accuracy or completeness of the information in this article.
Investors acting on the information in this article do so at their own risk and AJ Bell Media Limited and its staff do not accept liability for losses suffered by investors as a result of their investment decisions. Shares is published by AJ Bell Media Limited part of AJ Bell.
