How to Invest Like a Pro

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The investment world can appear rather complex at first. However by sticking to some basic principles the process of investing can become a lot simpler.

Important concepts to understand when learning how to invest like a pro:

TERM

DEFINITION

Asset class

Refers to different categories of investment such as cash, bonds, property and equity.

Bear market

A market in which share prices are falling, encouraging selling.

Bull market

A market in which share prices are rising, encouraging buying.

Financial product

Generally refers to a financial instrument in which the consumer invests in exchange for an anticipated return. This return is directly affected by the level of risk associated with the asset class invested in.

Shares/stocks

These words are used interchangeably and refer to ownership in companies or funds held by an individual or group.

“Bear markets have always been temporary. And so have bull markets.” Franklin Templeton. 

The introductory words of investment great, Franklin Templeton, emphasise the temporary nature of market cycles.

The two important questions to ask when learning how to invest: 

  • What is the purpose of the investment?
  • What is the timeframe of the investment?

After answering these questions it becomes easier to structure your investment strategy and make appropriate investment decisions.

One can then determine the level of risk and the investment time frame required for the financial instruments and asset classes considered.

There are many different schools of thought when it comes to investing, however certain principles are ever-present amongst most successful investors when it comes to their stock selections.

Essential principles to follow to know how to invest like a pro:

Take a long-term view

It’s difficult to consistently yield high returns over a short term due to market fluctuations and the inability to predict market movements accurately.

Most successful investors therefore decide on a long-term strategy and allow it the necessary time to succeed.

Besides the aspect of volatility, real growth is a result of compounding and can therefore only take place when given sufficient time.

Avoid following the herd

There’s a basic principle of buying low and selling high.

It sounds simple enough, but very few investors consistently apply this principle.

[tip title=”moneysmart tip”]Stick to your investment decisions and don’t be swayed by flavour-of-the-month opinions. When the majority of the market is buying you should be selling and vice versa.[/tip]

Be contrarian

This adds to the previous point of avoiding mass consensus and encourages opposing or rejecting popular opinion.

Don’t be afraid to swim against the stream as the most popular method for selecting stocks seldom seems to be the most successful.

Diversify

This is a frequently used term for good reason.

By diversifying your investments you spread your risk and in doing so, avoid having all your eggs in the wrong basket at the wrong time.

Lessons on how to invest like a pro can be learnt from two of the most notable investment heavyweights of our time:

Warren Buffett

The Snowball”, one of the most notable aspects of Warren Buffet’s investment philosophy, i.e. Buffet believes in the power of compounding over time.

In terms of investing this means starting early (Buffett started investing as a teen), avoiding short-term risk (even if it means lower possible returns) and letting investment returns build upon themselves.

Franklin Templeton

Bull markets are born on pessimism, grow on scepticism, mature on optimism and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.”

Templeton was not afraid to take a contrarian view in terms of investments and by sticking to his investment decisions and consistently applying this principle, he has solidified himself as one of the investment greats of our time.

In conclusion, there are no specific secrets to investing, there are however basic principles that can be followed in order to achieve consistent long-term growth.

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For all your financial planning and consulting requirements email 
Raul Jorge.

References:
Anand Chokkavelu. (2010). Buffett’s Top 10 Investing Secrets.Available: http://www.fool.com/investing/general/2010/03/18/buffetts-top-10-investing-secrets.aspx. Last accessed 18th June 2013.
Steve Christ. (2013). The 10 Secrets of Successful Investing. Available: http://moneymorning.com/2013/04/26/the-10-secrets-of-successful-investing/. Last accessed 18th June 2013.

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About Author

Raul Jorge is a CFP® professional at PSG. He specialises in estate, investment, retirement and risk planning. Prior to joining PSG, Raul completed his BSc (Honours) in Business Administration through the University of Wales and more recently completed his Postgraduate Diploma in Financial Planning through the University of Stellenbosch.