Four important points towards successful investing
Anyone can invest, but only those who consider these four points will succeed.
By Amr Hussein Elalfy, MBA, CFA
6/21/19 4:55 AM
To have a good and successful investing, the investor must identify some important points before making any investment decision to buy one of the different asset classes. These points are as follows:
- First, identify the asset to be bought, be it a commodity or even a currency, etc.
- Second, determine the fair value of that asset or its expected future price.
- Third, determine the expected time period to achieve the desired return.
- Fourth, determine the maximum loss and be disciplined.
Unfortunately, many investors are caught in the trap of investing when they identify the first two points and forget or neglect the last two, which usually determines the success of the investment decision or the lack thereof. Success does not mean buying at a low price and selling at a higher price (although this is what every investor wants), but success here is to decide to sell at a higher price in a timely manner to achieve a positive return or a lower price to avoid major losses. Within this lies the problem where the psychological situation affects the investment decision, thus striking out any plan that was developed before investing. Investors may have different errors due to the psychological situation. Overconfidence (in case of a gain) and denial (in case of a loss) cause a bad and wrong investment decision. Investors must set a price target for their investment to be achieved over a given period, taking into account the different catalysts to reach that price. Investors should also determine from the outset the maximum loss if these factors are not realized.
Looking at Arab stock markets, many investors are excessively interested in the price levels of major market indices. On one hand, having a general view of the market indicators may help the investor determine the direction of the market in the future. On the other hand, assuming a positive view of the market index, the investor will not be able to buy the entire market unless there is an index fund traded in the market. Therefore, it is recommended that the investor rely on a short list of cheap stocks by comparing their market prices vis-à-vis their fair values and specifying a time period to reach that fair value. Buying specific stocks is the way to achieve positive returns rather than determining the direction of the market. There are many stocks that may yield good returns when the market index declines.
In my opinion, generating gains in equity markets is "smart investing" — the Ben Graham School, starting from identifying excellent companies and waiting for their share prices to reach below their fair values by 30-35% before making a purchase decision with a target price set within a certain time period. Also, do not forget to set a maximum loss which will protect your investment portfolio from future losses which may mount if you continue to deny the fact that you made a wrong investment decision. We must remember that wealth is achieved through the purchase of certain assets, such as stocks, not just the market index.