Stock Investing Tips for Beginners: Making Wise Investment Decisions

Much of my investing strategies stem from fundamental investing and value investing. I adopt strategies similar to those of Warren Buffett not only because he is a well-known investor, but because they make more sense to me.

That is the key to successful stock investing. Don’t listen to anyone just because you think they have more stock investing experience than you. Rather, seek to think, analyze, and read more on your own before deciding which strategy is best suited for you. Once you have developed your own investment philosophy, stick with it and trust only yourself.

My investment philosophy

1. Don’t lose money.

As many people already know, Warren Buffett stated his two rules of stock investing in a humorous way where Rule number 1 is “Never lose money” while rule number 2 is “Don’t forget rule number 1” .

Principal preservation is important because a stock that has lost half its value will need to double in value before it returns to square one. This is why you need to be extremely cautious in your stock choices and that brings us to rule number 2.

2. Have a margin of safety

The margin of safety, simply put, is a buffer you place between what you perceive to be the value of the stock and its price. If you value a stock at $1 and only buy it if its price is 50 cents, then your margin of safety is 50 percent.

Deciding how much margin of safety to give a stock varies for companies in different industries and is another subject unto itself.

In short, a margin of safety is necessary to protect your capital in case you are wrong in your initial evaluation of a stock selection. That way, even if you were wrong, you would have bought the stock at a much lower price than if you had not factored in a margin of safety.

3. Invest for the long term

There is no way to time the market, but many people seem to think otherwise. They buy when the stock is down a bit and hope that in the near future they will be able to sell it for a profit. These people often adopt a “hit and run” strategy where they are content to earn about $100 each time they place a trade. They also have a stop loss strategy where they will exit the market if the price falls beyond a certain amount within a few days of buying the stock.

The truth about the stock market is that real money is made in a few days. If you go in and out of the market frequently, chances are that during the few days of an actual price increase, you won’t be in the market, so you will lose profit.

Investing long-term also saves you broker commissions, capital gains taxes, and puts the power of compounding at stake. The difference between trading the market and buying long is significant and should not be ignored.

4. Know when to sell and when not to sell

Although I advocate investing for the long term, that doesn’t mean holding on to my investments forever. When I value a stock, I already have in mind how much the stock is worth and therefore already have an exit price in mind. The purpose of value investing is to buy this stock at a significant discount to its value.

However, there may be times when the market is euphoric and the stock price rises well beyond what I have priced in. At this point, I will reassess the company to see if I have missed any key news or factors that could be responsible for the increase in price. If my valuation of the company stays the same, I’ll sell the stock because there’s no reason I shouldn’t take advantage of the market madness.

It is important not to be greedy at this point and keep increasing the starting price you have set. Have a starting price and stick to it.

The opposite also is true. Most people panic and sell when the price goes down and that doesn’t make sense. When a stock price falls, check the fundamentals again. If nothing has changed, then your assessment of its value should be the same, and this means the stock is at an even greater discount than the one you previously bought. In this case, you should take the opportunity to buy more shares of this type.

5. Carry cash with you when there are no good stocks to buy

There are many reasons to carry cash when there are no good stocks to buy. Many people find it difficult to do that. By the time they have some cash in hand, they want to buy some stocks because if they don’t, they feel like they’re not in the market and therefore aren’t “investing.”

Also, having cash with you allows you to capitalize on sudden drops in stock prices due to some market fluctuations that are not the result of a change in the companies’ fundamentals. In these cases, you should average down and buy more of that stock. The worst thing that can happen to you is not having cash to average down a purchase that now has a higher discount than before, due to your need to always keep all your money in the market to “feel like you are investing”.

Summary

Investing is not just about buying stocks. The homework and preparation behind identifying which stocks to buy is the real key factor in successful stock picking. Many people spend a lot of time checking the prices of the shares they have bought several times a day. That time is better spent researching the company and its business. Ultimately, checking the price of a stock several times a day will not influence the price or the fundamentals of the company. But I’m sure many people are guilty of this, as I see clearly at my workplace, where everyone has a little window open to check stock prices from time to time.