Guest Author - Guido Deboeck

Why is investing so difficult? Actually it is not, but most people are considering investing to be a skill that can be mastered only by professionals, brokers investment managers, analysts, or some exceptional individuals.

This assumption is totally wrong. Investing is not more difficult than any other subject. Proper investment management is a skill that can be learned by anyone! Why are so few inclined to learn it? Why are so many still relying on their broker to tell them what to buy or sell?

There are two easy explanations. If you rely on a broker for advice on what to buy or sell, you are into some assumed partner relationship, whereby if the performance of your portfolio turns out less than spectacular, you can easily blame your broker that he pulled you down. I often hear people say that their portfolio was not doing well because their broker picked the wrong stocks although they themselves made the decisions or that the markets were not very good to them last year…

The more complex explanation is that investing requires study, dedication, focus, discipline, patience and perseverance. Let us take each of these and provide some explanation.

Surely, it is difficult to understand how the markets work without study of the basic concepts and principles. Without understanding of fundamental measures such as earnings, sales, profit, return on equity, number of shares outstanding, capitalization, debt it would be hard to pick companies that have strong fundamentals. It is impossible to know when to buy or when to sell stocks without elementary skills in chart reading. The evolution of market prices and volumes do tell when to buy or when to sell.

To study the fundamental quality of companies and to learn basic skills of reading charts is nowadays tremendously facilitated by financial newspapers, some magazines and many books. No need for a college education, although one certainly never hurts.

Beyond the study of the basics there is need for dedication i.e. the willingness to keep on learning. In my office I have two large Chinese calligraphies. One of them reads in Chinese sui ji fing bian , which translates into: “Nothing is more important than adapting to changing conditions” Buy-and-hold may have been a profitable strategy for many in the past, but in today’s volatile markets and rapid changing economies, it is crucial to keep learning and adapting to changing circumstances.

Investing requires focus, meaning concentration. Would it surprise you to read that out of 10,000 companies listed on the exchanges there may be only a hundred or so worth following; that out of a hundred there are only five to ten that may fit in your portfolio? Many investors achieve mediocre results because of too large diversification; they keep ten to twenty or more stocks in their portfolio.

It is interesting that people who have a hard time remembering several seven or ten digit telephone numbers assume they can remember ten to twenty company symbols, their fundamentals, their prices and volume trends. Keep it simple: hold portfolios that contain five to seven stocks at the most, and remember to keep only those that deserve to be kept. More on this will come in a future letter.

Disciplined investing means that you make a plan, have a strategy, follow your own rules, and execute your trading transactions like clockwork. Undisciplined investing means that you let your emotions get in the way. How come a stock you bought just last week is now twenty percent down? Maybe, you want to hold onto it because " it surely will bounce back...". A week later the same stock is maybe 25 or 50 percent down and you still are not sure when to sell. If you do not set firm rules for selling losers and holding on to your winners, you still can improve on disciplined investing.

Finally, a few words about patience and perseverance: It requires patience to undertake all the homework to pick the right stocks. It requires patience to let your winners run. Perseverance is necessary over time, because no matter how skilled you become in investing, there will be times that you, jsut like anyone else, even the real pros, will have setbacks. Many of us remember the period from March 2000 till October 2002 when the markets were so negative that few could claimthey weathered the storm.

Investing requires all the skills needed by anyone who likes so excel in a particular field or sport. Any other field or sport you like to succeed in requires study, focus, concentration, discipline, patience and perseverance. This is what makes the difference between a great athlete and those who seldom get a medals. To earn your Olympic Gold or Silver in the markets you need to practice just like the best athletes.