DIY Investor Magazine
/
2015 Issue
17
I have heard many men talk intelligently, even
brilliantly, about something – only to see them proven
powerless when it comes to acting on what they
believe. Investors must act in time.
Bernard Baruch
STEP 2: ANALYSING THE IDEA
Once a share has been selected for further examination,
the serious investor has to find out whether it really
is an interesting investment by looking at financial
information in the annual reports, assessing the
business’s competitive position, trying to form a view
of the management and estimating the company’s
intrinsic value.
However, here too, a number of psychological forces
lurk which can jeopardise the value of an analysis – e.g.
•
It is not unusual for an investor to form a certain
(positive or negative) view even before the real
analysis. You may, for example, have a positive bias
towards a company whose name appeals to you or
that sells the type of products you are fond of. Such
preconceptions make it harder to make a neutral
evaluation of the company if the investor then goes
looking for evidence to confirm this view and to
dismiss counter-arguments.
•
Another typical example is that some people
buy shares in the company they work for without
hesitation as they consider themselves insiders who
know a good deal more than the average person
about what exactly is going on in the company.
More often than not, that’s an illusion. Not doing
your homework because you think you know a
company inside out, whereas you don’t even know
the most fundamental financial information on it
(the position of most employees), can be a serious
error.
STEP 3: BUYING AND SELLING
In the last phase of the investment process, a decision
has to be taken on whether or not to buy the share
that you’ve analysed. Or you need to take regular
decisions on whether to keep, sell or buy more of the
shares already in your portfolio. This may seem easy
but can be very difficult in practice because countless
psychological forces often lead to irrational buy and
sale transactions. For example, numerous investors
refuse to buy stocks in a bear market, even if they’re
quoted at prices that they could have only dreamed of
in a previous bull market.
My book Excess Returns: A Comparative Study of the
Methods of the World’s Greatest Investors goes into
great depth into the above steps of the investment
process. In so doing, I look at the way in which a wide
selection of very successful investors operate and how
their approach to the investment process sets them
apart from less successful investors.
In Part 2 later in DIY Investor Magazine I look at a
number of classic buy and sell mistakes.
