After the first attempt on investing, I felt like I know nothing about the company and the market but placing bet on the share price to be increased. I could feel the danger signal corroding me financially and mentally. My way of investing blindly had to be changed!
I started with reading books from the authors who made great returns as they claimed. The contents are as follow:
- Investing philosophy. These books discuss how you can become a successful investor. These are the basis of investment and in depth about the position as an investor.
- Investing psychology. These teaches how you can become a disciplined investor following the strategy you have decided.
- Fundamental analysis. These books provide explanation on the items in the financial statements (balance sheet, income statement and cash flow statement). They also provide formulas to calculate different financial ratios which show the big picture of a company. Some books even list the stock screening requirements on picking the stocks with high returns. Example, profit margin, P/E ratio, P/B ratio, ROE, etc.
- Technical analysis. Charts are the major tool for analyzing the buying and selling market prices of companies. Some indicators utilize statistic knowledge on finding out the trend of the price goes. Example, moving average, volume, MACD, RSI, etc.
- Combination of fundamental and technical analysis. These authors suggest not only solely of either fundamental or technical but utilizing both knowledge to understand the stocks wisely.
To become a successful investor, you should first understand the basis of investing through philosophy and psychology to find your correct approach prior to investing. The analysis technique is only helping you to screen the companies but if you don’t have a good understand and strategy, you will still fail even if you pick the correct companies.
For example, if you are a long term fundamental analysis investor, you shouldn’t sell your stocks unless their financials have changed to the opposite side. You shouldn’t be interrupted by the fluctuation of the market prices. Buy and hold is the correct strategy to become successful in this case.
If you are a short term technical analysis investor, you have to follow the setup on stop-loss and take-profit strategy. You shouldn’t sell the stock if the company is having trouble financially unless the price drops under the stop-loss limit.
Since there are so many different approaches for making positive return, I don’t think there is a perfect way. You should decide your strategy based on your goals, needs, knowledge, etc, and follow the strategy. You should also test out the different strategies and see which fits you the best.
Investing is interesting and it takes a long way for learning to become successful.
Continue to – Generating Financial Spreadsheet.
PATH TO INVESTMENT 