Sunday, November 26, 2006

Have you got an investment philosophy ?

You should develop an investing strategy if you are to succeed in the marketplace. When I first did this it was very hard to know what I should include and how it could be structured. They are of little concern now and are a minor detail compared to the other considerations for an investment philosophy.

To help you out I have written some important steps below that will help you formulate your philosophy.

1. Put them in Writing
putting something in writing makes it real. Without it in writing you can easily change your philosophy with the change of your mood. It also helps you to crystallize your thinking and acts as a signpost when the market moves and you are pit against your emotions of greed and fear.

2. Read about others Investment Philosophies
There are heaps of different ideas on how to make money from the market. You should read about other successful investors such as Warren Buffett or Phil Fisher. Read everything and anything you can on investing and make up your own mind on what you think is common sense and will work.

3. Make it yours
You can copy someone else but you will never learn that way. It also gives you an out to blame someone else for your losses. You need to make your philosophy your own and develop it yourself. It can take flavors from other investors but you should be comfortable in what you are doing and why you are doing it.

4. Experience
You need to understand how the market works and be involved. You will take a few losses and get a few winners. The idea is to get a feel for it as experience is the best teacher. I find every major loss I have teaches me something new which strengthens my investment philosophy.

5. Don't rely on backtesting
I can come up with numerous systems that work when back tested but do not work in real time. It is easy for a computer to optimize everything for a system so it shows huge gains in the past but it fails in the future. A good quote from Warren Buffett is that investing by looking backwards is the same as "driving a car [forward] with the rearview mirror". Make sure your investment philosophy is based on principles that are so ingrained that they should work in the future and are not some optimized number.

6. Patience
patience must be a key element. If you are developing a long term investment philosophy you need to have confidence and patience that it will work. For a short time frame 3 years is usually enough to see if your philosophy is working or whether you need to change it. Remember if you are going to buy a stock you are buying the company and not renting it for a short term period.

7. Measure your Progress
Your plan should have points to measure against the market. These may just be profit or may be risk adjusted profit. You should measure against industry funds and indexes so that you have a reference point on how you are performing.

8. Known your Assets
You should invest in areas you are comfortable. If you do not understand drilling reports then do not invest in oil exploration stocks. Stay in the area you understand. This can be broad enough to cover a few industries providing you have a good grasp on the industry outlook and you feel you can get a good understanding of the companies involved.

Now get going and write down that investment strategy that you are going to follow.

Good Luck Investing.

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