Investor homework piles up facts and profits
Part 7, the final post of the seven part White Top View series: Playing Market Odds, discusses two important characteristics of superior investors, doing homework and using facts. The seven part series covers ways that superior investors play market odds and avoid common investment errors. Links to all seven parts of the series are at the end of this post. Investor homework piles up facts and profits that let you achieve the performance of a superior investor.
In earlier parts of this series we discussed Norbord. There are some negative opinions about NBD but not a negative consensus. I recommend staying in NBD. Long-term I have expectation of great profits.
Using Norbord as an example presumes that we have done our homework and know the target before we invest. Only evidence or fact based decisions consistently work. Ego based or feeling based hunches do not. When we “know” we are right and the market is wrong, being stubborn and staying with foolish and expensive losing decisions can sink your returns. Avoid that sort of horribly expensive ego driven error at all costs.
If we buy on the fly without doing our homework in advance, we invite disaster. Following the herd or acting on a hunch without researching the investment is not investing. That is gambling. Buy lottery tickets when you feel the need to gamble. When it comes to investing, make clear-headed fact based decisions.
That will not guarantee that you always win. But it substantially improves the odds and tips then in your favor.
The situation is favorable when our current homework or earlier research indicates a specific company is a buy. Then, should the price dip, we can confidently buy. If we already own the company, buying more is simply averaging down. That is not something I recommend.
Our last two posts that discussed averaging down prompted today’s question. In this series Part 1: 6 Sins of beginners – Investing misses, averaging down was one of six issues discussed and in Part 3: Investing means economy, market and company all say yes, included strong recommendations to avoid averaging down. Please see them for the broader discussion on why we avoid averaging down.
From those previous discussions we already know the odds are less favorable for our portfolio when we do so. So that situation means we simply do not buy the dip.
For a new company that we do not already own, all is different. That is because the odds are different. We watch the dip carefully and are not in a rush to get in. Always remember that we want the odds tilted in our favor.
That stops us from considering ever buying on the way down or trying to pick the bottom. Such moves tip the odds against us.
When we have the mindset to buy, it can be very tempting to be the first in at the bottom. When right or lucky, you get both the profit and bragging rights. But when wrong you lose capital and get to feel like a loser. You are. So avoid the head fakes when the price plunges lower yet. Do not move too early.
Such ill timed moves destroy the favorable odds and put you underwater. Even when such a situation turns in your favor and ultimately becomes a success, you earn a fraction of what could have been made.
Be patient. Wait for the up-trend to become established. Then buy as it rises. At that point the odds have shifted to favor your investment.
Load up and enjoy the profit as the momentum carries you higher.
That approach means you always pay more than the bottom price but it also means that you are not caught by a dreaded head fake. That happens only when you are in too early. When investing we are not playing one position. We are striving for overall portfolio performance. Be patient and do what is best for your portfolio. Patience pays handsomely in investing.
Patience and homework are your two biggest investing tools. Investor homework piles up facts and profits, patience lets you wait for opportunity and enjoy the long ride to prosperity and financial security.
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Links to all parts of this series follow: