As a longterm investor I am part of the statistics as a fairly succesful one. One might say a very fortunate one. I am an avid opposer of day trading, not only because of my own feeble and failed attempts, but also because I have seen so many good people loose all, and more, of their money. They are not part of any statistics anymore.
I believe it is a common fallacy to think that risk and reward is connected in a linear way. if there is a connection I would venture that it is a negative linear corelation. The more risk the lower the rewards.
There is nothing wrong with risk. I actually like it. Biotech stocks are one of my favourite kinds. But I always try to manage the risk, which sometimes can mean to increase your position when your company gets into headwinds. But this is, if your analysis is correct, not a setback, but another buying opportunity.
I am an advocate of disproportionate betting much like you do in poker. The lower the odds, the smaller the implied bet. The lower the risk the more of your portfolio you can risk.
I have been doing this for 15+ years in ups and downs. Loosing is part of investing, but if you do your due diligence your can´t meaningfully fault yourself. No one could foresee the bust of Lehmann Brother, the criminal nature of Enron or whether a drug is fatal to patients in a phase 3 study. The effects, however, on your portfolio could be devastating if you don´t set rules (and follow them – which is the hard part).
Rules of engagement: First of all you need to have the money to invest. And I mean not leveraged, not borrowed – but real savings. That has to be the base. It has to do with your patience. It is very important to be patient because the market can go crazy for a long long time. And if you are leveraged it can stay crazy longer than you can stay solvent.
The absolutely best advice anyone will ever give you in your investment career is this: diversify, diversify and diversify. It is essential to put your money to work in different companies, industries, currencies and marketcaps. I would not recommend anyone to have below 10 stocks at anytime.
Less trading equals more profits in the longterm. Thats true on many levels. First of you save a lot of transactional fees at your brokerage. Second you save taxes on your profits which can then add to a bigger snowball. And last if you have found a really good company why not stay with it for the long run. If profits are retained in the company your net worth in it will just grow and grow. Maybe not the first year, but it will come.
Time. You need a long investment horizon. The longer the better. I am 43 now and I have a plan going for a retirement at 67. Thats when I need the money. You should at least allow 2-3 years to pass before you cash out. That enables you to do some longterm bets that can ride through the hysteria and schizofrenia of Mr. Market.
Research. There is no substitute for it. Which is probably why you ended up here in the first place. I never invest in anything if I haven’t read their latest 4 report and their investor presentation. Five things I always want to know is: Cashflow, P/E, Debt, Book Value and Growth. I always read their outlook. Always. Refinancing of debt is particularky important at these times. I ask people who know more about the stock than I do what they think.
Timing. It is impossible to time your investments, but you dont want to do it when everybody else is doing it. And you don´t spend all your cash instantly. My best strategy is to build a position in 3 buying steps. I always wait for the next Q- or annual report to make my bigger investment. If I like what I read I build from there.
Size matters! I am always careful when I invest in smaller companies because there are so much more risk factors in both sales, organisation, financing facilities etc. There is also a lot less money around to go into small cap as opposed to large cap. Given the choice I prefer the bigger company,
Let your profits run. If the company is performing, adding value, sales and earnings year over year. Stick to it. Let valuation unfold. Once everyones get their eyes up a company could be trading at 25 p/e or even above, then might be the time to say goodbye. But if the growth is still there you should stick around.