Developing Your Own Investing Style
A couple of weeks back, the news was flooded with reports of Warren Buffet’s investments in General Electric and Goldman Sachs. Mr. Buffet is undoubtedly one of the greatest investors to walk the face of the planet, so how wrong can you go by just blindly following his lead? Well, if you do not share Warren’s investment strategy or have his time horizon, you can find yourself in a chaotic world where you are feeling out of control of your investments, and potentially falling into a bad decision that can cost you a lot of money.
For example, if you are looking to save for retirement over the next 30 years (long-term, value investing), you will need a totally different investing style than if you are looking to put some extra money in your pocket each week by trading (momentum or short-term day trader).
To be a successful (read: profitable) investor, you first must go in with a game plan that fits the mold of your life goals, personality, risk tolerance, and financial situation. Here are some items to ponder when developing your own personal investing style.
Set your goals
A sound investment strategy first begins with setting a goal to attain via investing. A goal is a tangible item, such as saving a fixed amount for a home or car purchase or perhaps boosting your income by a certain amount each month. If you go in saying you want to buy a home or have extra cash to party on the weekends, your investments will likely be fruitless unless you have actual numbers to tie them to.
More importantly, if you need $50,000 for a down payment on a home in five years, you will need to employ a different approach to investing than if you were looking for an extra $500 each month to supplement your income. Setting your goal will determine the tone of your investing future. For instance, if you have a 30-year time horizon for your retirement account, it may make sense to stick to larger cap companies that have strong histories of paying and raising their dividends. If you have a one-year time horizon, you may have to find high-growth companies that choose to retain their cash to fund future expansion (rather than paying dividends). Although sticking to one approach is more effective, if you choose to have different goals, you should have different accounts and strategies for each so you can keep them separate.
There are a few more tips to consider when developing your own investing style…
Work within your limits
When developing your own investing style, your personality plays a tremendous role in how you can most successfully invest. For example, you may be adverse to strong intestinal fortitude to take big bets on speculative investments or to go against the investing grain. If that is the case, you are likely better suited for investing in mutual funds and automatically adding funds each month to your investments. You would not want the high intensity of trading or taking risky bets to cloud your judgment. Especially if you are a novice investor, stepping outside the box puts you more in fight-or-flight mode rather than objective, decision-making mode.
When you are in control and work within your personality boundaries, you can make excellent decisions and feel confident in your strategy. Eventually, you can learn to step outside your comfort zone, but that takes practice. In the mean time, stick to your guns and you will avoid emotionally charged decisions such as selling to early — or even worse, never.
Stick to what you know
Some may argue that investing is not gambling. Sports betting or poker is not gambling either — but only to those that have such extensive knowledge of the situation that they can make the best decisions. When developing your investing style, take stock of your business skills and the industry that you work in. It may seem like the day-to-day grind to you, but that first-hand experience provides you with an edge over everyone else who does not have a clue about the business you work in. If you venture outside your sphere of knowledge, you can be hit by events that you do not fully understand.
A simple rule to follow is: If you do not understand what a company does, it is probably not wise to throw money at it. Additionally, from an investing style standpoint, if you are a value investor (where you look for undervalued companies based on earnings and financials), investing in momentum or technical analysis trades is probably not the way to go.
money styles
You are your own person, and your investing style should be as unique and custom-tailored to you as possible. Certainly, there are buckets of investment types out there, but odds are not many have exactly the same job, income, personality type, financial goals, and ambitions as you. Formulate a plan that you feel 100% comfortable with — the better the suit fits, the better you look and the more confident you feel, and such is the case with your finances and investing.
