In Part 5 we discussed various investing strategies. Once you have decided which investment strategy to follow based on your risk appetite, return expectations and horizon, you need to acquire the tools required to implement the strategy. It is at this stage of the process that most investors fail to follow through. Without these tools your decisions regarding which shares to buy and sell will be based largely on tips from brokers, analysts, friends etc. and your understanding of business and your intuition. While these decisions could turn out to be winners, the risk is very high and you could end up with big losses. After a while, you are most likely to abandon the market all together and seek comfort in other investing avenues that could yet prove fruitless.
To avoid such outcome, you will do well to acquire these tools and horn them as you gather more experience in investing. This is my eighteenth year of investing in the stock market and I am still learning. Charlie Munger, Buffet’s right hand man once quipped that investing should not be easy considering it has the potential to make you extraordinarily rich. While investing is not easy, it is also not rocket science as it does not require super intelligence to understand and implements its tools and techniques. It is difficult because it requires us to go against typical human behavior such as our desire for less pain compared to more gain or our rush to extrapolate the past into the future or our refusal to accept it when we are wrong or our propensity to follow the crowd and invest at market peaks.
The tools for successful investing except if you want to be a pure chartist, in which case you will be categorized a speculator rather than an investor are certainly within the reach and understanding of most investors. These tools only require that you spend time and effort to understand them and to learn how to use them to implement your investing strategy. The basic tools are:
1. An understanding of risk and returns.
2. An understanding of financial statements and how businesses make money and an ability to carry out basic financial analysis.
3. An understanding of various methods of valuing shares.
In the next few parts, we shall focus our attention on these areas.