Are you a wise investor?
February 17th, 2008 Ogbuotobo Chuks || chuks@stockmarketnigeria.com
By Ogbuotobo Chuks
A wise investor is not just one that makes money. A wise investor is also one that make prudent decisions, based on careful calculation of risk based on future prospects. Although there are many other things that characterize such a fellow, some things are common base for all that fall into this category of wise investors. A few of them are listed below.
Analyse the P/E ratio correctly.
Most investors often place too much importance on the 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 doesn’t necessarily mean a security is undervalued, nor does a high P/E ratio necessarily mean a company is overvalued.The wise investor therefore makes sure that in analysing stocks with the P/E ratio, the industry average is also taken into consideration, as other companies operate within the same environment.
Develop a strategy and stick with it
Different people use different methods to pick stocks and fulfill 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. The wise investor always has a plan and strategy for every period of trading and stays with it. Planning is key because it is based on this that outcomes can be predicted and acheived.
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. The point is to base a decision on future potential rather than on what has already happened in the past.
Wise investors 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 doesn’t 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 specialized skills.
In summary, becoming a wise investor requires that you at least have or exhibit some of these patterns. So, you can start adopting some of the above mentioned traits and see how it works for you.
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