Keep your expectations realistic
Effective stock investing is not about doubling your money in one month. Sure, a lot of websites promise this with some newfangled technique or the other.... but really, these are just "Get-Rich-Quick" schemes.
Success in investing comes by being patient, continuously learning, and being rational. A goal of 10-15% return consistently, year after year, will make you a hugely successful investor.
To put this in perspective, 20-30% average annual return is what investment legends like Peter Lynch and Ben Graham had achieved during their careers.
Invest in what you know
It's absolutely essential that you understand the business you're investing in. Warren Buffett calls this the "circle of competence."
Look around you. You can always spot investment opportunities by concentrating on what you already know and are familiar with. Some examples would be the industry you work in; restaurant chains, retail stores, etc. in your neighborhood that always draw large volume of customers.
Invest for the long run
"Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years. "
- Warren Buffett
Day trading can be exhilarating. The sheer adrenaline rush of buying and selling based on technical indicators, stock tips, changing investor mood, weather patterns in Nepal, etc. is addictive.
But if you're buying stock in great companies at attractive prices, trading in and out of the stock washes out all the effort put in picking the stock in the first place. In addition, great companies don't lose their greatness at the drop of a hat .... they have enduring competitive advantages.
So it really pays off to be in it for the long run.
Know when to sell
While it would be theoretically nice to own stock in a company for eternity, you have to be in tune with practical realities. The key question that most beginning investors have is: "When to sell?"
It's very easy to get attached to companies you've invested in. This can sometimes be dangerous, especially if it makes you ignore potential signs of trouble.
Buying stock in a company is like buying the business
Buying stock in a company should involve research and analysis along the same lines as buying a business.
Stocks are not just things to be traded — they represent ownership interest in a company. So when you buy stock in a company you should treat the undertaking similar to buying the whole company ... always do the necessary due diligence.
Use market fluctuations to your advantage
The market usually is fairly accurate in pricing stocks. However, sometimes, emotions get the better of investors. At times like this stocks can be mispriced.
What should a beginner, or for that matter, any serious investor, do at times like this?
Never sell in panic just because the market is under-valuing your stock. In most cases, this is only temporary.
In fact, times of maximum pessimism like these are when the best bargains are to be had. Buying meaningful amount of stock at huge discounts in companies that you've researched demands a lot of courage, but the payoff is well worth it.
On the other hand, what should the investor do at the other extreme — overvaluing?
If you find the stock price of companies you've invested in way above what you've valued them, this might be a good time to sell. Sooner or later the market will correct itself and it's best to lock in your gains before that happens.
When investor emotion causes the market to fluctuate wildly, it's worthwhile to recall Ben Graham's Mr. Market Parable.
Always insist on a margin of safety
No matter how well you know a company or to how many decimals you estimate it's stock price .... there are always surprises. How do deal with this?
You use a margin of safety to help protect you from some of the unpredictability. Of course, you can never completely insulate yourself from downturns .... but when you use a margin of safety, the probability of huge losses is significantly lower.
Be able to explain your picks
You should be able to explain your reasons for buying a stock. Selling your idea first, preferably to someone else, can help you spot flaws in your reasoning.
The key points you should touch upon?
Describe the reasons you are interested in the company, what has to happen for the company to succeed, and the obstacles that might prevent its success.
Block out the noise
Unless you're a professional investor, the time you have available for investing is very limited. The media is full of all kinds of stock tips, stock analysis and advice, and predictions about the market. It's very easy to get overwhelmed in this ocean of primarily useless noise.
Your limited time is best used to researching companies you're interested in buying.
Think independently
How often have you been tempted to dive into a stock purchase based on what the "talking-heads" and so called "experts" on TV recommend? It's a lot easier to leave the thinking to the experts. But remember ... it's your money and you have the biggest stake in it. So a little effort now will reap rich returns later.
Being able to think independently also means that quite often you will find yourself going against the crowd. Don't be afraid to do so as long as you've done your homework.
Remember .... investing is more about having the right temperament than being exceptionally intelligent. In the words of Warren Buffett, ""Investing is not a game where the guy with the 160 IQ beats the guy with a 130 IQ. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing."
Beware of the diversification trap
An important beginner stock marketing investing point is the discussion on diversification. If your goal is to actually do the work of researching companies, understanding their financials, and estimating their intrinsic value, then diversification will actually hold you down.
On the other hand, if you really want to get into the stock market but don't have the inclination or the time to pick your own stocks, then diversification is absolutely essential.
