The Motley Fool

3 ways to be a better investor in 2013

It’s already the second week of the new year, but there is still time to make those resolutions and commit yourself to some form of improvement in 2013.

The past year was an interesting period in the world of investing – plunging interest rates and the subsequent dash for dividend paying stocks, the collapse and recovery in the iron ore price, Greece’s survival in the euro, billionaire investor activists mayhem, and plenty more.

Last year gave us much to learn from, whether we are freshly minted stock pickers or seasoned analysts. Let’s take a look at three lessons courtesy of 2012 and how they can make you a better investor for 2013 and beyond.

Realise that the trend is not your friend; it actually hates you

Though never an integral philosophy for the long-term investor, momentum investing still appeals to many. The next time you are tempted to hit the buy button on a hot stock, remember a basic rule of gravity: Objects gain momentum when they are going downhill.

Maverick Drilling & Exploration (ASX: MAD) was the most obvious example of a too-hot-to-touch stock in 2012.

Maverick began 2012 with a stock price of around 22 cents. Although we highlighted it as a Stock on Our Radar as far back as August 2011, at the turn of the year this small oil company was still largely undiscovered.

But that was all about to change. After announcing a doubling of its reserves in early January, Maverick shares took off, soaring as high as $1.49 in April, a stunning rise of 577%. It’s the stuff of investing dreams.

Here at The Motley Fool, although we were happy shareholders ourselves, when the shares hit $1.30 we advised Motley Fool Share Advisor members to take part profits, saying Maverick’s share price will ultimately be based on its potential cash flows, and that was where we weren’t so bullish.

After a fall back to around $1 in May, come August, Maverick shares again traded at close to $1.50. Reported reserves continued to soar, as did its exploration acreage, and a share placement raised US$50m.

Although the newsflow for Maverick continued to be strong, including the stock being added to the S&P/ASX 200 index and a joint development which effectively valued the company’s reserves at a significant premium to their share price, Maverick’s shares ended 2012 trading at 72 cents.

A 227% gain over the course of the year placed Maverick as the best performing S&P/ASX 200 stock of 2012, just beating out Motley Fool Share Advisor recommended stock Sirtex Medical (ASX: SRX).

Yet for many ‘investors’, it felt like a loss, or worse, they made actual losses trading Maverick in 2012. That’s what happens when you follow the share price, and not the business.

In 2013, don’t play into market madness; it won’t help you buy your stocks at a discount. Stay focused on fundamentals and erase the time factor from your decision-making.

Don’t buy into sexy

If there is one clear lesson that 2012 gifted to us, it’s that the latest and greatest isn’t a one-way ticket to market success.

One of the year’s most notable events, felt here in Australia, was the Facebook IPO. With the most disruptive website in the history of the Internet enjoying a billion users and being the quintessential big-moat, high-switching-cost company, Facebook sucked in even highly conservative investors with its growth prospects.

As we almost instantaneously found out, this didn’t translate to the 10-bagger some were predicting. While Facebook is without a doubt an incredible company with a very compelling future, it was the fundamentals that kept the stock (to this day) below its introductory price. No matter what a company is doing, never neglect the reality behind the hype.

In 2013, if you want to avoid getting duped into another Facebook, don’t buy into sexy. Let the fancy stuff pass you by and keep your focus on companies that you understand and that are priced attractively.

Turn off the noise

The 24-hour news cycle is killing us all. It’s easy to become victim to information overload — following the latest and greatest Aussie dollar quote, or the day to day machinations of the gold price, is not going to do anything to your investing portfolio.

Keep in mind that the very best analysis you can do is the most direct — reading ASX releases, talking to competitors, or just popping in to the shopping mall to see where the checkout line is longest.

Everyone has an opinion — some are right and some are wrong. When you bolt for the computer every morning to read every bit of insight on your stocks, you’re subjecting yourself to a lot of noise that can instil fear and doubt into your very soul.

In 2013, commit yourself to less exposure. You’ll sleep better at night, and it will likely help your portfolio, too. Best of luck to you in 2013, investors. May the Gods of Finance treat you well.

Attention: Smart, Foolish, dividend loving investors can click here to request a Motley Fool free report entitled Secure Your Future with 3 Rock-Solid Dividend Stocks.

Bruce Jackson is The Motley Fool’s General Manager. He has a holding in Maverick Drilling & Exploration. You can follow The Motley Fool on Twitter @TheMotleyFoolAu . The Motley Fool’s purpose is to educate, amuse and enrich investors. This article contains general investment advice only (under AFSL 400691).

 

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