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5 Steps to better investing

Today is Worldwide Invest Better Day — a day The Motley Fool has put aside to help people understand the opportunities that can come from investing in shares.

Worldwide Invest Better Day

Before I kick off with my 5 Steps To Better Investing, a gentle reminder that if you aren’t already a subscriber to Motley Fool Share Advisor — our premium subscription-only best-of-the-best stock picking service — now might be a great time to jump on board.

If you’ve not joined yet, you’re not too late. But I wouldn’t leave it too long…this Thursday 27th September at 4.28pm I’ll be emailing my brand new top stock for new money to Share Advisor subscribers (ONLY).

Sign up here.

In honour of Worldwide Invest Better Day, today kicks off a 5 part series we’re calling ‘5 Steps to Better Investing’.

Over the next 5 weeks, we’ll cover 5 topical issues that we hope will help you make better investing decisions.

Step 1: You don’t have to make it back the way you lose it

We’re only human — and prone to the psychological challenges that come with the territory.

Chief among them is an over-reliance on the immediate past, and the tendency to extrapolate the most recent past into the future. For many, that has meant a 2011 that went from bad to worse — and felt terrible.

Our human nature also puts unnecessary constraints on our investing. When a stock we own has fallen below our purchase price — or if we’ve made some money, has fallen from a recent high — we can tend to fixate on making that price a ‘target price’ of sorts.

Whether we’ve made or lost money on that particular company, the risk is still the same. When we invest, it should be the company and its prospects that are important. No previous share price — or future hoped-for share price — is meaningful for the company itself, nor for the company’s customers or suppliers.

Let bygones be bygones Our tendency to hold on to a company’s shares ‘until the price goes back up’ is exposed as an understandable, but erroneous errand.

As investors in Billabong (ASX: BBG)Myer (ASX:MYR) and JB Hi-Fi(ASX: JBH) know, prices can fall precipitously when a company releases bad news to the markets.

Once the price has fallen, however, investors need to put that loss to one side. Painful and difficult, yes, but also very necessary.

The Motley Fool has long encouraged investing for the long term, with holding periods ideally measured in years rather than weeks or months, but we also know that vigilance is required.

If your reason for investing in a company still holds true, and a company remains valuable despite the bad news, it might be time to hold, or even to buy more.

If the investing thesis has been undermined by recent events, it may be time to sell.

Invest in your best ideas

With limited funds, an investment decision is no different from a weekly budgeting decision — investing in one stock means those funds can’t be used for a different decision.

If I believe Company A has a better combination of business economics, growth potential, management expertise and share price than Company B, I should buy shares of Company A (all else being equal, and taxes notwithstanding). I don’t expect I’d get much argument from anyone on that point.

Accepting that premise is one thing, but acting on it can be very different — especially when you already own one of the companies.

There is unfortunately no shortage of companies trading well below their January 1, 2012 share prices, including popular stocks like Leighton Holdings (ASX: LEI)Qantas (ASX: QAN)Lynas (ASX: LYC) and TEN Network (ASX: TEN).

Some are trading near two or three year lows. Others have had a stunning run over the past few years.

Reassess and take action If you have shares in the former group, I would strongly encourage you to not hold those shares simply because you’re sitting on a loss and you’re planning to wait until the price recovers.

Equally, if you’ve had a good run, don’t sell simply because the price is up, or hold for the same reason. Instead, subject your holdings — and prospective holdings — to the Company A vs. Company B test.

If the companies you hold are the best place for your money on that basis, you should consider holding with confidence. If they fail, holding on to them while you wait — perhaps in vain — for the price to recover, simply consigns your portfolio to continued underperformance.

Foolish take-away

Worldwide Invest Better Day gives us all a chance to reset our investing scorecard.

I’m not suggesting that ignoring the past is a good strategy — far from it. Experience is an important part of successful investing. Trying to divine success from periods as short as a single year will lead to a multitude of errors.

That said, the opportunity to mentally reset — to put the past behind us — can act as a psychological circuit breaker.

As you look ahead, remember to look at your portfolio with fresh eyes — and resist the temptation to stubbornly hold on to a stock just because ‘it owes you money’.

To see a little more about this important topic, click the image below for a short video on not having to make it back the way you lost it:

 

(If you can’t see the video, above, it might be due to firewall or browser settings. We can’t do much about the former – especially if you’re viewing the video at work – but if you’re having trouble, you might want to change your browser settings or try downloading Google Chrome)

Happy Worldwide Invest Better Day, and until next time, as ever, we wish you happy, profitable investing.

Foolish Best,

Scott Phillips

Scott Phillips
Investment Analyst
Motley Fool Share Advisor

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