Tips for successful long-term investing

While it may be true that in the stock market there is no rule without exception, there are some principles that are tough to dispute.

Let's review 09 general principles to help investors get a better grasp of how to approach the market from a long-term view. Every point embodies some fundamental concept every investor should know.

1. Sell the losers and let the winners ride.

Time and time again, investors take profits by selling their appreciated investments, but they hold onto stocks that have declined in the hope of a rebound.

If an investor does not know when it's time to let go of hopeless stocks, he or she can, in the worst-case scenario, see the stock sink to the point where it is almost worthless.

Of course, the idea of holding onto high-quality investments while selling the poor ones is great in theory, but hard to put into practice.

2. Do not chase a "hot tip". Whether the tip comes from your brother, your neighbour or even your stockbroker, you should not accept it as law.

When you make an investment, it's important for you to know the reasons for doing so: do your own research and analysis of the company before you even consider investing your hard-earned money.

Relying on a tidbit of information from someone else is a risk you could take in investing in companies. Sure, with some luck, tips sometimes pan out. But they will never make you an informed investor, which is what you need to be successful in the long run.

3. Do not sweat the small stuff. As a long-term investor, you should not panic when your investments experience short-term movements. When tracking the activities of your investments, you should look at the big picture.

Remember to be confident in the quality of your investments rather than nervous about the inevitable volatility of the short term.

The gains of a long-term investor come from a completely different market movement - the one that occurs over many years - so keep your focus on developing your overall investment philosophy by educating yourself.

4. Do not overemphasize the P/E ratio. Investors often place too much importance on the price-earnings ratio (P/E ratio). Because it is one key tool among many, using only this ratio to make buy or sell decisions is dangerous and ill-advised.

The P/E ratio must be interpreted within a context, and it should be used in conjunction with other analytical processes. So, a low P/E ratio does not necessarily mean a security is undervalued, nor does a high P/E ratio necessarily mean a company is overvalued.

5. Resist the lure of 'penny stocks'. A common misconception is that there is less to lose in buying a low-priced stock. But whether you buy a Rs. 5 stock that plunges to Rs. 0.50 or a Rs. 75 stock that does the same, either way you have lost 100% of your initial investment.

6. Pick a strategy and stick with it. Different people use different methods to pick stocks and fulfil investing goals.

There are many ways to be successful and no one strategy is inherently better than any other.

However, once you find your style, stick with it. An investor who flounders between different stock-picking strategies will probably experience the worst, rather than the best, of each. Constantly switching strategies effectively makes you a market timer, and this is definitely territory most investors should avoid.

7. Focus on the future. The tough part about investing is that we are trying to make informed decisions based on things that are yet to happen. It's important to keep in mind that even though we use past data as an indication of things to come, it's what happens in the future that matters most.

8. Adopt a long-term perspective. Large short-term profits can often entice those who are new to the market. But adopting a long-term horizon and dismissing the "get in, get out and make a killing" mentality is a must for any investor. This does not mean that it's impossible to make money by actively trading in the short term. But, as we already mentioned, investing and trading are very different ways of making gains from the market. Trading involves very different risks that buy-and-hold investors don't experience.

As such, active trading requires certain specialised skills. Neither investing style is necessarily better than the other - both have their pros and cons. But active trading can be wrong for someone without the appropriate time, financial resources, education and desire. Most people do not fit into this category.

9. Be open-minded. Many great companies are household names, but many good investments are not household names.

Thousands of smaller companies have the potential to turn into the large blue chips of tomorrow.

In this article, we have covered 09 solid tips for long-term investors.

There are exceptions to every rule, but we hope that the common-sense principles we've discussed benefit you overall and provide some insight into how you should think about investing.

(Source:

www.investopedia.com)

(Courtesy: CSE)