Guidelines for Wise Investing

So you’ve saved enough to start investing and you’re about to explore the securities industry. Great! But you need to know a few things before you jump right in. In addition to practicing the basics: consulting with a registered financial advisor, and conducting research to ensure that the company and the security are registered with the Trinidad and Tobago Securities and Exchange Commission (TTSEC), here’s a guide to help you start investing ‘like a boss’.

1.  Keep It Simple.

Those who trade too often, focus on irrelevant data points, or try to predict the unpredictable, are likely to encounter some unpleasant surprises when investing. By keeping it simple and focusing on companies with economic safeguards, and investing with a long-term horizon–you can greatly enhance your odds of success.

2.  Have the Right Expectations. 

Are you getting into stocks with the expectation that you’ll get rich quick? Well think again. You may not double your money in the next year investing in stocks. Such returns generally cannot be achieved unless you take on a great deal of risk, for instance, buying extensively on a margin (borrowing money from a broker to purchase stock). Though stocks have historically been the highest-return asset class, these returns have also come with a great deal of volatility.

 3. Be Prepared to Hold for a Long Time.

In the short term, stocks tend to be volatile. Trying to predict the market’s short-term movements is not only impossible, it’s maddening. Too many investors are focused on the seemingly popular or thriving businesses, and then grow frustrated as the stocks of their companies–which may have sound and growing businesses–do not move. Be patient, and keep your focus on a company’s fundamental performance.

4.  Tune Out the Noise.

There are many media outlets competing for investors’ attention, and most of them centre on presenting and justifying daily price movements of various markets. This means lots of prices–stock prices, oil prices, money prices, flour prices–accompanied by lots of guesses about why prices changed. Unfortunately, the price changes rarely represent any real change in value. Rather, they merely represent volatility, which is inherent in any open market. Tuning out this noise will not only give you more time, it will help you focus on what’s important to your investing success–the performance of the companies in which you own shares. Your investing skills will not improve by only looking at stock prices or charts; investors improve by getting to know more about their companies and the world around them.

5.  Behave Like an Owner.

Stocks are not merely things to be traded, they represent ownership interests in companies. If you are buying businesses, it makes sense to act like a business owner. This means reading and analysing financial statements on a regular basis, weighing the competitive strengths of businesses, making predictions about future trends, as well as having conviction and not acting impulsively. You have a right to know all you can about your investment. If in doubt speak with your registered financial adviser. If you think you are not being treated fairly, you can use the escalation process outlined to you when you hired the company and if still dissatisfied you can ultimately lodge a complaint with the TTSEC.

6. Buy Low, Sell High.

When stocks prices fall, some financial gurus state that is generally the time to buy! Similarly, when prices have skyrocketed, they are high, and that is generally the time to sell! Don’t let fear (when stocks have fallen) or greed (when stocks have risen) take over your decision-making. Buy or sell based on sound financial judgement.

7.  Watch Where You Anchor.

Unfortunately, many people anchor on the price they paid for a stock, and gauge their own performance (and that of their companies) relative to this number. Remember, stocks are priced and eventually weighed on the estimated value of future cash flows which businesses will produce. If you focus on what you paid for a stock, you are focused on an irrelevant data point from the past. Be careful where you place your anchors.

 8. Remember that Economics Usually Trumps Management Competence. 

Keep in mind that while management changes may occur quickly (for better or for worse), the economics of a business are usually much more static.

 9. Be Wary of Management.

Though the economics of a business is key, the stewards of a company’s capital are still important. Even successful businesses can be poor investments if there is improper management. If you find a company that has management practices or compensation that makes your stomach turn, watch out. Ensure you consult with your registered financial adviser before investing.

10. Bear in Mind that Past Trends May not Be a True Indicator of Future Success

If a company has a strong record of entering and profitably expanding new lines of business, make sure to consider this when valuing the firm, and not place your determination solely on past trends.

The Trinidad and Tobago Securities and Exchange Commission is not an investment advisor nor is it a brokerage house. This article is intended solely to provide you with the information you need to make sound investment decisions and to ensure that you are familiar with and understand your rights and responsibilities as a consumer of financial services. To lodge a complaint, ensure that you complete the prescribed complaint form located on the TTSEC website www.ttsec.org.tt.