Learning how to manage money and build an investment portfolio is hard for even the best trained professionals. Gustavo Dolfino, a highly regarded investment banker has a few tips for you.
Invest in an Area You Know
As Warren Buffett says, “stick to your circle of skill.” In other words, stick to what you know.
Remember to diversify, and try to invest in sectors and industries that are uncorrelated to each other. This is a basic principle – spread the risk.
Do not let “FOMO” get in your way. Fomo, or “fear of missing out,” is a strategy employed by high pressure sales people, to get you to commit to something, before you have done your due diligence. Research your investments, and only invest when and if you are ready.
Understand the Difference between Market Value and Intrinsic Value
There is a difference between the market value of a stock (price) and its intrinsic value (assets making up the company minus its liabilities). In other words, the price might be correlated to the company’s worth, but it might also be inflated or deflated.
It is important you do your research above and beyond what analysts say in their research reports. You should go beyond traditional indicators such as price to earnings and cash flow to ebitda ratios. Look at tangible versus intangible assets (such as good will and patents). Look at free cash flow.
At the wrong price, the best investment can turn out to be a dud.
Know When to Get Out
Don’t fall in love with the stock. Remember, trying to buy at the lowest price and sell at the highest price, has been the ruin of many an investor. You need to have discipline and cap your losses, with a predetermined criteria relating to what price or events will trigger a stop, or stop limit order, and under what circumstances you may become a buyer.