The importance of being a wise investor

Successfully investing in stocks requires patience, discipline and a sound understanding of the market

By the Securities and Exchange Commission of Sri Lanka

The International Organization of Securities Commissions (IOSCO), the global standard-setter for the securities sector, launched its third annual World Investor Week (WIW) on 30 September, with it set to run until 6 October. 

The Securities and Exchange Commission of Sri Lanka (SEC) is an ordinary member of IOSCO and a member of the policy committee on Retail Investors (Committee 8).  

The WIW is a week-long, global campaign promoted by the IOSCO to raise awareness about the importance of investor education and protection, and to highlight the various initiatives of securities regulators in these two critical areas. This year the SEC is planning to conduct a range of investor-focused initiatives to promote investor awareness. 

To coincide with WIW, SEC Sri Lanka would like to highlight some important factors that an investor should think about before investing in the stock market.

Making money by investing in stocks requires plenty of patience and discipline as well as a sound understanding of the market. Besides, it is only when you understand the fundamentals of investing that you can learn how to invest in stocks with confidence.

Although no definite formula has been discovered for successfully investing in stock markets, the golden rules given in this article, if followed prudently, may increase your chances of getting a good return.

Make informed decisions

When making an important investment like purchasing a car, an investor would most likely first do some research on the preferred model and its closest competitors. Similarly, proper research should always be undertaken before investing in shares. 

Companies that issue shares are required to produce many public documents. These publications will often not only have earnings data but information about the company, the market and opinions of experts. Once you’ve done your research, you’re ready to begin purchasing shares.

Invest in a business you understand

Many successful investors follow this rule of thumb. Never invest in something you don’t understand. In other words, before investing in a company, you should know what business the company is in. Be sure to always read an Initial Public Offering (IPO) prospectus, annual report, company announcements or circulars carefully. If you can’t understand the investment and how it will help you make money, ask a trusted financial professional such as a Registered Investment Advisor for help. If you are still confused, you should think twice about investing.

Don’t try to time the market

Is there a right time to invest in the stock market? That’s the magic question people have asked for as long as the stock market has been around. The simplest answer is that it’s extremely difficult to predict how stocks or the stock market will do. 

Never invest in something you don’t understand. In other words, before investing in a company, you should know what business the company is in. Be sure to always read an Initial Public Offering (IPO) prospectus, annual report, company announcements or circulars carefully. If you can’t understand the investment and how it will help you make money, ask a trusted financial professional such as a Registered Investment Advisor for help. If you are still confused, you should think twice about investing

You can try to find the right time to invest or find the wrong times to avoid, but you will never get it correct 100% of the time. Too many factors are involved for you to figure out the perfect time to invest. For the average investor, a diversified portfolio, held for a long term, is the best strategy.

Follow a disciplined investment approach

In the words of Warren Buffet: “Successful investing takes time, discipline and patience. No matter how great the talent or effort, some things just take time.” 

Investors who put in money systematically, in the right shares and hold on to their investments patiently have been seen generating outstanding returns. Hence, it is prudent to have patience and follow a disciplined investment approach besides keeping a long-term broad picture in mind.

All in all, disciplined investing is the right way to go if you need long-term benefits and want financial stability and there’s no shortcut to it.

Do not let emotions cloud your judgment 

It is said that markets are driven by just two emotions: fear and greed. Money is always an emotional subject, but often when emotions get involved with your investment decisions you will make wrong decisions. And they can be costly mistakes. 

Even the most professional and experienced investors do not make the best decisions when they let emotions cloud their judgment. Therefore, keeping emotions away from investment decisions can give you a better chance at success.

Create a broad portfolio

Diversification is a familiar term to most investors and can be summed up with this phrase: “Don’t put all of your eggs in one basket.” 

Diversification of a portfolio across asset classes and instruments is the key factor to earn optimum returns on investments with minimum risk. The level of diversification depends on your personal time horizon, risk tolerance, investment goals, financial means and level of investment experience. 

Have realistic expectations 

The objective of investing is to get returns. But investors need to be realistic about the return on their investments. The stock market is not a gambling place so don’t expect to become a millionaire overnight. Being realistic about your expectations is the most important step in achieving success in the financial markets. 

Therefore, setting your expectations prior to investing is one of the most crucial aspects for investing success. As the saying goes, you won’t know when you’ve arrived if you don’t know where you are going. Investing is much the same.

Monitor rigorously

Investing is not an easy, hands-off endeavour. Monitoring your share portfolio will enable you to make more informed decisions on when to buy and sell shares. Therefore, establish a routine, timeframe and process to review your holdings. Modern technology makes it easy to constantly keep an eye on your portfolio. If you are uncomfortable monitoring your investments yourself, hire a Registered Investment Advisor to help. Always browse your stockbroker firm’s website or the official website of the Colombo Stock Exchange www.cse.lk to get comprehensive up-to-date information. Investors are also advised to visit www. sec.gov.lk, the official website of the SEC, to get useful information. In addition, ensure that you scrutinise all the documents that you receive from your stockbroker.

Avoid a herd mentality

A typical buyer’s decision to purchase shares is often heavily influenced by the actions of others. When markets are surging, everyone wants to buy shares, when the market plunges, investors sell their shares often without a rational reason. But this strategy is bound to backfire in the long run. 

The world’s greatest investor Buffett said: “Be fearful when others are greedy, and be greedy when others are fearful.” Therefore, a wise investor should not invest with a follow-the-crowd mentality.