Amidst the backdrop of chaos and uncertainty in the markets, it is important to go back to the basics.
1.) Reliability of the Investment
It is important to ask yourself 2 questions when considering a company: First, who controls the company, Second, do you trust them?
2.)Strength of the Investment
It is necessary to understand the financial position of the company. Balance Sheet, Cash Flow Income Statements can reveal alot about the hidden strengths & weaknesses of the company.
3.) You’re just too good to be true
Can’t take my eyes off of you~ Yup, thats right. If its too good to be true, you better not take your eyes off the investment! Always make an effort to understand how much the introducer/salesman of investment earns off your investment. If the sum is too huge, it is likely unsustainable. In addition, make an effort to understand how the investment reaps returns.
4.) Dun gamble, invest.
One of the common investment mistakes is selling low, and buying high. Unless you have insider information, it is difficult to time *Buy Low Sell High*. A straightforward method would be to employ Dollar Cost Averaging, or Unit Cost Averaging. A lumpsum investment would be applicable only if it is supported by fundemental and technical analysis.
5.) Having clear investment objectives
Everybody wants to make money, it is important to establish clear desired returns and cut loss mechanism so that the investor knows when to take profit, or reduce his losses.
6.) Understand the limits of statistical data
Company X or Fund Y beat their respective benchmark by Z%, hence we should invest into them! —- This is a common fallacy as Benchmarks as just measuring devices. Alternative comparison would be against similar Competitors or Funds.
7.) Humans are irrational creatures
The efficient market hypothesis is wrong! Markets are driven by humans, and since humans are irrational, hence markets are irrational. There is a time lag between people getting the information and people reacting to the information.
The famous saying by Warren Buffet: “ Be fearful when others are greedy and greedy when others are fearful” illustrates this point.
8.) Think long term
If a company sets up a factory, it expects to generate returns from it over a period of at least 10 years, so you should expect the same when you invest into it. Short terms are volatile due to inconsequential swings, hence it is imperative to assess a company’s long-term prospects and competitive edge.
9.) Bonus: Understanding the 3Cs
Have a clear understanding of the current cycle of the market; Are people buying, or selling?
Have your Cash ready, split it into at least 3 tranches.
Have the Courage to execute the investment trades when the stars are aligned.
Remember, when all hope fails, fall back to the basics.
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