How I Invest, Part 6: Beware of Research

(Credit: Ivy Dawned via Flickr)

(Credit: Ivy Dawned via Flickr)

In previous entries I discussed the importance of researching a stock before you buy it. Research, of course, doesn’t stop when you purchase a stock. It’s an ongoing activity.

As the world changes, so does the stock market and so do individual stocks and the companies they represent. As an investor, it’s imperative that we know what’s going on in a company when it’s happening and assess how those activities are going to affect the stock price.

A golden boy stock of one year may be a huge failure the next. BlackBerry (BBRY) comes to mind. Once a favorite in my portfolio, today it’s still alive as a company, but just barely. I sold the stock I owned years ago.

First Solar (FSLR) is another example. It’s stock price was over a $160 a share in February 2011, then fell to as low as $15 in July 2012. Had I had a magic ball I might have realized that was the perfect time to buy again. I didn’t. Today, the stock is hovering around $70 a share.

So why is this blog titled “Beware of Research?”

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How I Invest, Part 5: Avoid Emotional Decisions

(credit: YoTuT via Flickr)

(credit: YoTuT via Flickr)

All through my investing career, from the early days when I had good advice and lots of support, up until now — when I’m basically working on my own — I’ve made lots of mistakes.

Most of my mistakes are a direct result of my emotions taking over my reason — although at the time it feels like I’m protecting myself. Let me explain.

Part of my problem could be that I’ve never clearly defined what kind of an investor I am. If asked, I’d say that I’m a long-term investor — in it for the long haul. I pick a stock to buy believing that the company I choose to invest in has good growth potential, a steady pipeline of new products, an excellent financial base, and good management.

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How I Invest, Part 4: Picking Stocks

(Credit: Iman Mosaad via Flickr)

(Credit: Iman Mosaad via Flickr)

In this entry, I’d like to get right to the nitty-gritty of how I pick stocks. In some ways, this approach can be a lot of fun — it gives you a chance to think about you investments as companies that do things, and not just as stock certificates that up and down in value.

The following are some of the Peter Lynch principles that have guided my choice in stocks:

1. Invest in companies we already know.
2. Behind every stock is a company — find out what it’s doing.
3. Owning stocks is like having children — own only the number of stocks you can tend to.
a. We don’t need more than five companies in our portfolios.
b. Know what we own and why we own it.
4. Investigate a company’s financials before investing in it.

More details after the jump.

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How I Invest, Part 3: Keep It Simple

(credit: Ed Schipul via Flickr)

(credit: Ed Schipul via Flickr)

Peter Lynch in his book, One Up On Wall Street: How To Use What You Already Know To Make Money In The Market, came up with 21 of what he called “Peter’s Principles,” many which I took quickly to heart.

Since I’ve been thinking about that book again, I wanted to focus today on a few of my favorites principles for investing.

What I deem is the principle of the principlesKeep it Simple Stupid (KISS) — has become my number one guiding rule to investing.

There are way too many options when it comes to where I could put my money these days, and my mind muddles quickly. Investing in what I know and like — while ignoring those investment opportunities that I don’t yet understand — has done me well.

Peter Lynch says that if you can’t explain a company (and, I add, a financial concept) with a crayon, stay away.

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How I Invest, Part 2: Research and Education

(credit: La Citta Vita via Flickr)

(credit: La Citta Vita via Flickr)

I love to learn new things. I’m lucky that way. So when I had the inclination to start investing in the stock market, I sought out as much information as I could find about investing, absorbing it like a sponge. I talked in an earlier blog entry about One Up On Wall Street, and the influence Peter Lynch had on my investing style.

Remember, there was no Web when I started my investment journey, so researching meant time in the library studying the Wall Street Journal and other business journals, as well as the business sections of other top newspapers.

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