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In life, your success is the result of the different choices you make, compounded over time. All the vital and trivial choices you make, make you. This holds true for your investment portfolio as well. Finding the right investments can be confusing and exhausting, especially if you are investing in a foreign market. However, if you dedicate the time to understand your own needs, do the research, and recognize the risks involved, you will see that it is not rocket science. Here are some things to keep in mind before you invest:
1.) Trust what you already know: Instead of going in a completely unknown direction, begin with industries and companies you are familiar with. This is in line with the Circle of Competence concept developed by Warren Buffett and Charlie Munger. Knowing a specific sector or company will help you better understand the different investment opportunities.
2.) Do your research: Understand the patterns, and do not listen to the rumors. Do not invest without fully understanding a company’s revenue model. Dig out its past financial records. Find their official reports filed with the SEC. These are usually available in the Investor Relations section on the company’s website. Look for consistency instead of sudden growth.
3.) Take calculated and smaller risks: The market promises nothing. Losing a lot of money as an amateur investor can be a major blow to your confidence. You can not get rich overnight. Invest small, and focus on gradual growth.
4.) Look at the price-to-earnings ratio (P/E ratio): What does it mean for the share price to be cheap or expensive? One method to evaluate the value of a share price is to take the P/E ratio of the company and compare it with that of its peers in the industry. A high P/E ratio means that investors have high expectations of the company’s growth. It could also mean that the share price of said company is overvalued.
These are just some of the do’s. In future posts, we will share more of these as well as some of the don’ts. As Warren Buffett once said, the stock market is a device for transferring money from the impatient to the patient. Spend some time learning, spend some time learning by doing, and spend some more time learning from your mistakes. Eventually you will have enough to spend without worrying!
