How to be a Smart Investor

In this article, I am sharing some vital information to my readers on how to become a smart investor.

This article gives an insight to the required skills and actions to become a smart investor. 

There are several references and books are available about the subject. As it all vast, a well written article directly pointing to the nutshell of being a successful investor would be great.

Being a smart investor is not required much effort, but most required essential knowledge and common sense do.

So How to Become a Smart Investor?

Here are most important points I would like to discuss to achieve the goal of  being a smart investor.

These points are adapted from the experiences and practices of great investors like Warren Buffet, Benjamin Graham and Philip Fisher. 

1. Start Investing Early

Starting investments in the early ages ensures the capital grow along with the age of investor. If starts early, a person can do the investment with long time focus. Another advantage of staring investment in the early age is, the money required to invest is less. 

Here as some of the reasons one should start investing early:

1. Early investors can take the benefit from the power of compounding interest
2. Investors in the early ages, say in the age of 25, have capacity to take more risks
3. Quality of spending habit would dramatically improve
4. Quality of the life would improve to a great extend 
5. Can achieve the financial freedom comparing with those started investments late.

2. Identify Your Risk Tolerance

Identifying the risk-taking capacity of an investor is a vital part.  Some time, it related to the age of investor too. Risk tolerance level of an investor helps to identify the right investment instruments for him or her. 

For example, if you have very low risk tolerance, then certainly the stock market investing is not for you. In the same way, if an investor with high risk-taking capacity, he should not invest in the Bank FD’s or debt mutual funds.

But he should prefer investing in stock market along with building portfolio with high risk, high profit equity mutual funds.

3. Invest for Long Term

An investor must know the difference between Investment and Trading. Traders are focusing to momentum and with an interest to make money fast.

History clearly shows 98% of them are failed and suffered huge loss as the result of trading.

Investor is studying well about the investment opportunity and act accordingly with a long-term wealth creation focus in mind.

A trader cannot claim himself or herself as an Investor, but the suitable word for them is stock market gambler.

Why Warren Buffet still holds the shares of Coca Cola and American Express? This is the best example of long-term focus in investing.

Here as some of the reasons one should start investing early:

• Power of compounding again a key benefit
• Long-term investing focus reduces the risks
• Benefit from taxation on the gains such as dividends. 
• Investments held for longer period tend to exhibit lower volatility that short periods.
• Long term investment saves other expenses such as transaction costs.
• Long term investments are the best option to achieve long term goals such as retirement, buying home, child education, marriage etc.

4. Diversify the Investment Smartly

Remember the famous quote, “Do not put all your eggs to single basket”. An investor must identify the opportunities to diversify the investments smartly to avoid risk.

Utilize the power of various investment instruments starting from equity to ordinary bank fixed deposits.

Diversification should be done based on goals and the investment duration.

For example, investing money to equity for a goal that to be achieved after few months, is a bad idea. Liquid mutual funds are best in this case by considering the capital protection as well as liquidity. Such investment diversification methods to be learned and utilized by smart investors. 

5. You are Your Boss – Best Investments can be done only by you.

There are financial planners, stock market advisers available everywhere. Never invest on the advice on anyone, but one should do enough homework to find the best investment vehicles and invest on it right time.

6. Beware of Tipsters, Analysts, Rumors and Sef-acting Investment Gurus.

Advise is free and it is available everywhere. Investing world also have people giving lots of advises. Never rely on them. Instead, get necessary knowledge and do your homework before investing on anything.

Because of such advises freely available in market, Warren Buffet once told “Wall street is the only place that people ride to in a Rolls Royce to get advice from those who take the subway”. This quote exposing the foolishness on relying someone to take advice on your investments.  

Remember, lots of people have tasted the sour of failure by following the tipsters and rumors!

7. Never Imitate others

I have seen lots of investors focusing on the activities of big investors in their market and imitate the same. It’s a bad idea. Don’t follow uncle Sam as he may have different goals or ideas. You can take the best qualities from them but should not imitate completely. 

8. Don’t be Greedy

Smart investors should not be greedy when approach to investing. Instead, they must work to achieve the pre-set goal through right investments.

Remember, it is easy to find large number of stock traders everywhere in the stock market and can say undoubtedly that greed is leading them. Their intention is to become millionaires in a or two weeks! 

9. Learn from Successful Investors

This is the point where my personal investment activity started. In the beginning, I was interested to read about the great investor Warren Buffet, Philip Phisher etc, and compared the common qualities found on them.

Their patience, courage and the simple common sense to select investments attracted me a lot. This led me to pick the right companies with lots of growth potentials and advantages.

Advises from Warren Buffet through his biography and other books helped me to create my own “Personal Investment Framework” to identify and invest on great companies.

You can have the Wiley’s Investment Collection from the Amazon to buy and read. I will soon write an article on the list of classic investment books that every investor should have handy.

10. Never Marry to your Investments

Investments are meant to meet decided goals. Don’t be trapped by thinking that, holding any stocks or investments for long time would generate more income. It is absolutely wrong, holding a stock for long term is good, but that is totally depends on the quality of the company and its business. 

To understand the real meaning in simple words, before investing to any company stocks, the investor must ensure that the company will be existed in the market even after next 25 years.

This means, if you are willing to hold the stock of a company for next 20 years, you must confirm that the company business is capable to be there in the market after 20 years!

Happy investing!