Investing Knowledge

Did (A074130.KQ - news) you know that most shares lose money? And, apparently, most private investors also lose money. Frightening isn't it?

On the flip-side, stock market indices tend to rise over time. Over the past nine decades, the UK stock market has returned around 11% a year, when you include dividends reinvested. So it's not all bad news by any means. If you want a conservative investment, a cheap index tracker may be a good solution. But if you like to do a little DIY, then you're really going to have to try to avoid making investing mistakes.

So how can you achieve this? The simple truth is that you can't. Even Warren Buffett has made his fair share of mistakes in the past; it's a fact of life for investors. But you can avoid most mistakes. Here are the top ten ways to do so:

1. Safety first 

When picking shares, consider downside risk first, before looking at the upside potential. As Warren Buffet says: "The first rule of investing is don't lose money; the second rule is don't forget Rule No. 1."

2. Opportunity through volatility 

Don't try to time the markets. As Peter Lynch said "if you spend 13 minutes a year on economics, you've wasted 10 minutes." Short-term volatility creates long-term opportunity. Don't be scared out of good quality long-term investments by inappropriate stop-loss policies or short-term panic.

3. Cash is king 

Buy companies with excess cash flow. When a company has more cash coming in than going out, in combination with a strong balance sheet, it's not going away any time soon.

4. Price 

Relate everything back to the market cap; the company may be sound and well-run, but paying too much for it at the wrong time produces the same results as buying a bad company. Value usually pops its head up when the world is worrying about bird flu, swine flu, terrorist attacks or England's World Cup prospects! - See (0491.HK - news) 2, above.

5. Patience 

This is perhaps the single most important virtue an investor needs. If your investing horizons are too short term, the tendency is to behave like a headless chicken, chopping and changing as you seek the next big thing. It's a road to failure. Buy on the Warren Buffett principle of: "Would you buy the whole business if you could afford it?" then wait for the true value to emerge. Your investing horizons should be at least three years, preferably more.

6. Actions speak louder than words 

Look (Frankfurt: 867225 - news) at the numbers first. You can't always trust what a company says but the numbers speak for themselves. Management is important, but it's a secondary consideration to the bottom line.

7. Value first 

Finding good value shares doesn't preclude growth shares. Many value shares still have the prospects for growth, but you aren't paying over the top for all that wide open blue sky.

8. Open-mindedness 

Don't be too specific and limit your investment opportunities. True value can emerge in companies of all sizes across all sectors.

9. History is bunk 

According to Henry Ford: "History is more or less bunk". Hear, hear. The number of years a company has been around, how well-regarded it is, and however "institutionalised" it may appear to be won't account for much when the chips are down. If you don't believe me, ask investors in Marconi or Northern Rock (LSE: GB0001452795.L - news) .

10. Self-discipline 

Devise your own checklist, pin it above your screen -- and adhere to it. You'll always miss opportunities that everyone else seems to be into. So what? And try not to make the mistake of "making" a potential investment fit your criteria.

Happy hunting.

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