In order to beat the market, you cannot behave like the general investing public. The general investing public is dominated by the so called hope-greed-fear-despair-syndrome. Their emotion goes through a cycle of these four states over a typical market cycle and their investment activities are dictated by their emotional state at any one time rather than by valuationi of the stocks.
Unfortunately, the typical investor?s emotional state is determined by the past and current state of the market.
Because the market is always cyclical, their emotional state usually lags the development in the market. Thus the best time to buy stocks is when everyone is in despair (a situation an investor in the general investment public was in a few months earlier) and the best time to sell share is when everyone else is at the most euphoric.
However, it is a much easier to verbalise this principle than pratise it. Human beings are social animals and it is extremely difficult for any of us not to be a part of the crowd.
2. Never invest in one go
Repeatly, we have to stress that is is impossible to predict the market over the short time (that is, one year or less). The only good way to invest is to spread out your purchases over time.
This principles applies not only to investing your total amount of funds but also to investing in individual stocks. We usually build up our equity investment over a period of time (one year or more) and we usually space out the purchases of an individual stock over four tranches.
But on the selling side, we tend to be quicker in taking profits.
3. Invest in value stocks
By ?value stocks? we mean stocks which are lowly valued in terms of traditional measures of valuation. In the main, three such measures are used ? PER, DY and price/NAB (NTA).
All our purchases are predicated on the target stock being lowly valued in terms of one or more of these three measures.
Of course, it is not possible to be right all the time. We bought Subur based on its low-expected PER but its FY2000 EPS came in much lower than we ahd forecasted.
Similarly we bought PK Resources based on its low Price/NAB but its earnings performance had beeen so poor that it is now selling at even lower price/NAB than when we bought it.
However, over time, most of our investments turned out investments turned out reasonably well. We occasionally have star performers like Bumi Armada or Palmco which have produced so much profit that we are able to more than cover some of our losses.
4. Never be afraid to take profit
Although a well-known Wall Street dictum has it that one shuld ?let your profits roll but cut your losses short?, we are not entirely sure we agree with the first half of the quote except during exceptional bull markets (which only occur once every 12 years or so).
As another will-known Wall Street saying goes: ?One never goes bankrupt selling too early.
5. Do not freeze into inaction over mistakes
It is the nature of investing that mistakes are made, sometimes even big ones. A critical part of being a successful investor is not to be driven into inaction over past mistakes.
One should try to work oneself out of the mistakes. Market cycles are every investor?s best friends. And in making use of market cyclicality, may investment errors can be worked out.
If an investor had bought a share at over-high valuation, provided the investor?s view of the share has not changed, the investor should always average down the cost by buying lower.
Sometimes, it may be necessary to ?over-buy? a share in order to bring down the average cost to a lever which will give the investor a reasonable chance for reduced loss at the next upturn. The investor could then sell out at the next upturn, making profit on the latest purchase and reducing the average cost of the whole investment.
It may be necessary to repeat this process several times to bring the cost to a level where it is possible to breakeven.
If the investor does nothing, it may be a long time (if at all) before breakeven can be achieved.