There are many important rules you should follow when investing in shares.
One of the most important is: Never trade unless you have an advantage.
The importance of patience
When investing in shares, you have to be prepared to stay out of the market, or avoid tinkering with existing holdings, until you have an advantage.
This can take patience, strong nerves and the ability to resist ridicule from others who leap around the board like spring lambs. Such people often can point to a fabulous short-term gain, but on average tend to buy shares after they’ve gone up, and sell when they’ve already gone down.
Active traders on average tend to buy shares that don’t perform as well as the ones they sell. For ‘overconfidence’ read ‘greed’. Most investors will ignore the 20% profit on their investment and be eaten up by regret if someone else’s have gone up by 25%. They will often switch to the alternative security at just the wrong time.
How to gain a share market advantage
I always keep in mind the quote attributed to one of the Rockefellers: “No-one ever went broke taking a profit.”
So how do clever investors know when they have an advantage? My definition of having an advantage is having the confidence to buy when others are selling and to sell when the rest of the market is buying.
This confidence comes from looking at the big picture, investing for terms longer than the average investor.
Here’re some ways of gaining an advantage over the market:
- Buy companies with long term prospects that are being sold down for short term reasons.
- Buy companies that control and distribute information, or control and distribute finite resources.
- Follow the ‘smart’ money – that of successful investors and businesspeople.
- Decide what conditions must exist in a company before you buy or sell.
- Read widely, not just ‘how to invest’ books, but also history, economics, politics.
- Avoid emotional decisions – avoid overconfidence and don’t wait too long to take a profit.
While the outcomes with investing are never certain, successful share trading is about following some key rules. By following the rule of never trading unless you’ve an advantage, you should find you achieve great success.
Take a look at our other Stockfox educational articles and resources.