New Year's Resolutions For Successful Investing
In 2012
The Dynamic Wealth Report
January 4, 2012
by Marcus Haber, Editor
The New Year is underway. And the markets are kicking it off in grand
fashion. The Dow jumped 1.5% on the first trading day of 2012.
Not a bad way to start the year!
Of course, with a new year upon us, it's time to make New Year's
resolutions. Most people use this as an opportunity to go on a diet or
give up bad habits. But I like to use resolutions as an opportunity to
improve my investing.
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So, in continuing with the spirit of resolutions, I'm going to
tell you about three resolutions that I made many years ago. They've
served me well over the years. And I hope you'll find them helpful in
your trading.
My first resolution is fairly simple... before you buy a stock,
understand how the business makes money.
Believe it or not... many investors own stock in companies they don't
understand.
That's a sure fire way to lose your money.
You see, understanding how a business makes money is vital when owning a
company for the long term. Since a company's value most often hinges on
the cash flows it produces, knowing how those cash flows are generated
is pretty important.
For example... yesterday my colleague, Corey Williams, wrote about
Chipotle (CMG). The company obviously makes money by selling more and
more burritos. Apple (AAPL) grows its profits by selling iPads, iMacs
and iPhones. Apple then makes more money when those buyers purchase apps
from the App Store.
So, when I see long lines at Chipotle and the Apple store, it doesn't
take an MBA to figure out they're making lots of money. Under-standing
how a business makes money will allow you to quickly figure out if it's
in for good or bad times ahead.
From there, it's easier to determine if a stock should be owned or not.
Second on the resolution list... allow market volatility to work to your
advantage.
It's a long known fact, most inexperienced investors mistake volatility
for risk. They see a stock going up and down and automatically see it as
a risky trade. But that's not always the case.
You see, risk is the probability of suffering a permanent loss of
capital. Volatility, on the other hand, is the movement in a stock's
price. Just because a stock fluctuates up and down doesn't mean your
probability of permanent loss has increased. In fact, volatility can
actually help you make money.
Viewed this way, investors can take advantage of market volatility to
buy shares at better prices.
For example, I used volatility in 2011 to buy Goldman Sachs (GS) when
shares traded below $90 (just a few months earlier the stock was trading
around $175). Since I believe the true value of GS is around $200 a
share, I feel like the market volatility in GS gave me a golden
opportunity for big profits. And when Mr. Market gave me a chance to buy
GS shares on the cheap, I jumped at the opportunity.
With Europe still in trouble and the US economy far from healed,
volatility will most likely continue in 2012.
In short... investors armed with patience and conviction in 2012 will be
better able to take advantage of the market's wild swings.
Unfortunately, those investors looking to get in and out of stocks are
more likely to be hurt badly by market volatility.
Lastly and most important... focus on hitting singles and doubles,
and stay away from trying for home runs.
Obviously, I relate this to baseball. Usually a General Manager learns
quickly the value of a baseball player's on-base percentage. Meaning, a
player's value is derived from how often he gets on base. Hitting home
runs isn't the end all be all in baseball or in investing.
Simply put... investors who are constantly on the lookout for home run
stocks are going to strike out more often. Investors looking for stocks
with a greater certainty of smaller yet steady gains will rake in
profits more consistently...
In my many years of experience, I've known many wealthy investors who
are happy making 10% to 15% a year in the market. However, I have seen
plenty of investors lose tons of money by constantly going for the home
run.
No question... whether you're an investment pro or a retail investor, it
never hurts to pay attention to the basic principles of sound investing.
Follow my three resolutions and you'll be on your way to making money
more consistently in the market.
Safe Trading,
Marcus Haber
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