How to Become a Successful Investor
Investing in the stock market is one of the most profitable and the riskiest kind of investments. Nowadays, in most cases, investment allocation is a result of flowing cash to the assets where the current return and risk are satisfied a certain investor expectation. History evidences the different cases, when an investor started with a small amount of money and eventually became very rich, or on the contrary, when a millionaire lost all investments in the stock market and became poor. What is the most important quality that separates the winners from the losers in the stock investing? The answer is simple – it is knowledge in investing, either that is based on collected wisdom by other investors or gained through making own mistakes. Anyway, the following basic principles could be useful to remember:
Never invest all your money in the stock market, especially, if you are a beginner. Common recommended portion of invested money in stocks is from 25% to 50% of your total budget.
Never invest all money in one stock – always diversify among several stocks in different sectors.
Always watch closely general market conditions, especially, when bear market is about to start. Be prepared by selling most holdings in advance.
Never rush with investment solution. Carefully watch financial quarterly reports, news, and macroeconomics trends before making any decision.
Never let your emotions prevail over a rational disciplined approach.
To improve return/risk ratio, use reliable software tools that embody the investors' concentrated wisdom.
All stocks are volatile without exception. There will be always a certain probability that something suddenly will go wrong with any stock. Even the best stocks can depreciate.
Most losses in investing happen because of lack of knowledge, over-confidence, impatience, greed, fear, and different delusions. An experienced investor knows that there is a direct proportion between time spent to increase investing skills and return on investment so that self-education can help to improve investment skills. The following books could be good for improving the investment competence:
Lessons from the Greatest Stock Traders of All Time by John Boik (good introduction in investing)
Stock Investing For Dummies by Paul Mladjenovic (very useful and important to read book)
The following books by William J. O'Neil:
How to make money in Stocks
24 Essential Lessons for Investment Success
The Successful Investor
The first thing in investment analysis has to be fundamental analysis. It allows predicting a long-term stock performance and depends on many factors: company profitability and its growth, assets structure, market stock value relatively to earning, book value, and sales, etc. In general, any company and its stock can be considered as a system and the best model of such system quality is a combination of all influential factors with different weights.
Using technical analysis additionally to fundamental analysis can increase chances of successful investing. One of the best software tools to perform technical analysis is MetaStock. However, since there are hundreds of technical indicators with different interpretations for each of them, it is not easy to complete a full-scale technical analysis. Some investors use only some of indicators that are good from their point of view. In general, each indicator has its own ability to predict stock price. It should be taken into consideration that price of any stock goes up and down depending on other many factors, including general market and sectors conditions. That means there should be an optimal time for buying stock (as well as for selling). Therefore, timing analysis is also important.
To summarize, it is better to use the software that takes into consideration fundamental, technical, and timing analyses together. One of the computer programs on the market with such capabilities is Investment Analyzer InvAn by Addaptron Software. It combines the results of fundamental, technical, and timing analyses into a single composite rating using a special algorithm. InvAn defines prediction ability of each technical indicator and then combines signals from all of them into technical analysis rating using Artificial Neural Networks. The main output is the composite rating, i.e., the list of stocks from the worst to the best. Due to a fast and automatic data processing, InvAn enables watching hundreds of stocks. It also has other useful features, such as, calculating optimal cash reserve depending on the market condition and forecasting stock price on the basis of Fourier spectrum analysis.
Alex Shmatov, president and founder of Addaptron Software www.addaptron.com, has MBA in Finance and PhD in Mathematics, working on developing decision support systems for investors.
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