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QUALITIES OF SUCESSFULINVESTING

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INTRODUCTION TO INVESTMENT: 

Investment is the commitment of money or capital to purchase financialinstruments or other assets in order to gain profitable returns in the form of 

interest, income or appreciation of the value of the instrument. It is related

to saving or deferring consumption. Investment is involved in many areas of 

the economy, such as business management and finance no matter for

households, firms, or governments.

An investment involves the choice by an individual or an organization such as a

pension fund, after some analysis or thought, to place or lend money in a vehicle,

instrument or asset, such as property, commodity, stock, bond, financial

derivatives (e.g. futures or options), or the foreign asset denominated in foreign

currency, that has certain level of risk and provides the possibility of generating

returns over a period of time] 

Investment comes with the risk of the loss of the principal sum. The investment

that has not been thoroughly analyzed can be highly risky with respect to the

investment owner because the possibility of losing money is not within the

owner's control.

The difference between speculation and investment can be subtle. It depends onthe investment owner's mind whether the purpose is for lending the resource to

someone else for economic purpose or not.

In the case of investment, rather than store the good produced or its money

equivalent, the investor chooses to use that good either to create a durable

consumer or producer good, or to lend the original saved good to another in

exchange for either interest or a share of the profits. In the first case, the

individual creates durable consumer goods, hoping the services from the good

will make his life better.

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In the second, the individual becomes an entrepreneur using the resource to

produce goods and services for others in the hope of a profitable sale. The third

case describes a lender, and the fourth describes an investor in a share of the

business. In each case, the consumer obtains a durable asset or investment, and

accounts for that asset by recording an equivalent liability. As time passes, andboth prices and interest rates change, the value of the asset and liability also

change.

An asset is usually purchased, or equivalently a deposit is made in a bank, in

hopes of getting a future return or interest from it. The word originates in the

Latin "vestis", meaning garment, and refers to the act of putting things (money or

other claims to resources) into others' pockets.

The basic meaning of the term being an asset held to have some recurring or

capital gains. It is an asset that is expected to give returns without any work on

the asset per se. The term "investment" is used differently in economics and in

finance.

Economists refer to a real investment (such as a machine or a house), while

financial economists refer to a financial asset, such as money that is put into a

bank or the market, which may then be used to buy a real asset.

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In economics or macroeconomics:

In economic theory or in macroeconomics, investment is the amount purchased

per unit time of goods which are not consumed but are to be used for future

production. Examples include railroad or factory construction. Investmentin human capital includes costs of additional schooling or on-the-job

training. Inventory investment refers to the accumulation of goods inventories; it

can be positive or negative, and it can be intended or unintended. In measures of 

national income and output, gross investment (represented by the variable I) is

also a component of Gross domestic product (GDP), given in the

formula GDP = C + I + G + NX , where C is consumption, G is government spending,

and NX is net exports. Thus investment is everything that remains of total

expenditure after consumption, government spending, and net exports are

subtracted (i.e. I = GDP - C - G - NX ). Non-residential fixed investment (such as new factories) and residential

investment (new houses) combine with inventory investment to make up I. Net 

investment deducts depreciation from gross investment. Net fixed investment is

the value of the net increase in the capital stock per year.

Fixed investment, as expenditure over a period of time ("per year"), is not capital. 

The time dimension of investment makes it a  flow . By contrast, capital is a stock — 

that is, accumulated net investment to a point in time (such as December 31).

Investment is often modeled as a function of Income and Interest rates, given by

the relation I = f (Y , r ). An increase in income encourages higher investment,

whereas a higher interest rate may discourage investment as it becomes more

costly to borrow money. Even if a firm chooses to use its own funds in an

investment, the interest rate represents an opportunity cost of investing those

funds rather than lending out that amount of money for interest.[5] 

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Investment related to business of a firm – 

Business management:

The investment decision (also known as capital budgeting) is one of thefundamental decisions of business management: Managers determine the

investment value of the assets that a business enterprise has within its control or

possession. These assets may be physical (such as buildings or machinery),

intangible (such as patents, software, goodwill), or financial. Assets are used to

produce streams of revenue that often are associated with particular costs or

outflows. All together, the manager must determine whether the net present

value of the investment to the enterprise is positive using the marginal cost of 

capital that is associated with the particular area of business.

In terms of financial assets, these are often marketable securities such as a

company stock (an equity investment) or bonds (a debt investment). At times the

goal of the investment is for producing future cash flows, while at others it may

be for purposes of gaining access to more assets by establishing control or

influence over the operation of a second company (the investee).

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Investment related In finance:

In finance, investment is the commitment of funds by buying securities or other

monetary or paper (financial) assets in the money markets or capital markets, or

in fairly liquid real assets, such as gold or collectibles. Valuation is the method forassessing whether a potential investment is worth its price. Returns on

investments will follow the risk-return spectrum. 

Types of financial investments include shares, other equity investment, 

and bonds (including bonds denominated in foreign currencies). These financial

assets are then expected to provide income or positive future cash flows, and

may increase or decrease in value giving the investor capital gains or losses.

Trades in contingent claims or derivative securities do not necessarily have future

positive expected cash flows, and so are not considered assets, or strictly

speaking, securities or investments. Nevertheless, since their cash flows are

closely related to (or derived from) those of specific securities, they are often

studied as or treated as investments.

Investments are often made indirectly through intermediaries, such

as banks, mutual funds, pension funds, insurance companies, collective

investment schemes, and investment clubs. Though their legal and procedural

details differ, an intermediary generally makes an investment using money from

many individuals, each of whom receives a claim on the intermediary.

Within personal finance, money used to purchase shares, put in a collective

investment scheme or used to buy any asset where there is an element of capital

risk is deemed an investment . Saving within personal finance refers to money put

aside, normally on a regular basis. This distinction is important, as investment

risk can cause a capital loss when an investment is sold, unlike saving(s) where the

more limited risk is cash devaluing due to inflation. 

In many instances the terms saving and investment are used interchangeably,

which confuses this distinction. For example many deposit accounts are labeled

as investment accounts by banks for marketing purposes. Whether an asset is a

saving(s) or an investment depends on where the money is invested: if it is cash

then it is savings, if its value can fluctuate then it is investment.

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Real estate as the instrument of investment

In real estate, investment money is used to purchase property for the purpose of 

holding or leasing for income and there is an element of capital risk.

Residential real estate:

The most common form of real estate investment as it includes property

purchased as a primary residence. In many cases the buyer does not have the full

purchase price for a property and must engage a lender such as a bank, finance

company or private lender. Different countries have their individual normal

lending levels, but usually they will fall into the range of 70-90% of the purchase

price. Against other types of real estate, residential real estate is the least risky.

Commercial real estate: 

Commercial real estate consists of multifamily apartments, office buildings, retailspace, hotels and motels, warehouses, and other commercial properties. Due to

the higher risk of commercial real estate, loan-to-value ratios allowed by banks

and other lenders are lower and often fall in the range of 50-70%.

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QUALITIES OF SUCESSFUL INVESTING:

Given the potential rewards, the risks being reasonable and given a method of 

well-defined risk management the equity markets across the globe (to ourthinking) are the best game in town. However, the investor would require

qualities of head and heart to achieve this success. These qualities of the

successful investor listed and described below, would also be relevant to the

other financial markets.

Winners and Losers: Vast fortunes can be made and lost during brief periods of 

trading in the equity markets. Now, what separates the winners from the losers?

The key to successful trading in the equity markets are not only attainable, they

can also be learnt and taught. The successful investor exudes self-confidence, self-

assurance and singleness of purpose. His handshake is solid, purposeful and firm.

He looks you straight in the eye. He is well groomed and dressed.

Attitude verses Luck: The winners realize and recognize the importance of a

positive mental attitude. They know that the power to achieve comes from

within; and that positive motivation overcomes all obstacles to success. They are

of the view that, one must have the correct attitude to recognize the opportunity

for success.

We do realize that, a positive attitude cannot be replaced by the concepts of luck,

1positioning or political influence. Though these methods mentioned earlier also

have their place in the scheme of things; and can and should be utilized to

reinforce our positive mental attitude, but not replace it. In our struggle for

success, a negative attitude can easily spell ruin, just as the lack of a positive

attitude easily inhibits success.

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Think, See and Do: To be successful, you need to emphasize on these elements.

First, you must think. You must think about what you want to do and how you will

do it. Next, you must see an opportunity as it develops. And lastly, you must act

when the opportunity presents itself.

You must think, see and do, as these are the important elements to success.

A counter view, comforting to most people: The investor hopes for success in

vague terms, he organizes for it. But, when it came to visualizing a plan of attack

(or action plan) he was sorely lacking. Then, he did not visualize opportunities

when they presented themselves. Also, because he was so intent on not missing

opportunities and unsure about what opportunities he is looking for. So, he did

not see the opportunities when they did present themselves. As the investor hadfailed to see opportunities, he could not act in order to get a successful result.

Success follows: Success will tend to take care of itself, if you provide the proper

psychological and behavioral background for it to occur. Goals are wonderful,

without them we would be lost. Yet, the road to success must be paved with

behavior, attitude, opinions and visualization. Each person has his own personal

psychology and response style. There are four elements that comprise the

essence of success theory:

  The way in which, we as investors deal with loss and failure is just as

important, if not more important, than the way in which we deal with

success.

  Effectively controlling and channeling emotions are two very important

issues in the equation for success.

  Those who have been successful and continue to be successful as investors,

recognize the importance of market psychology and incorporate it in their

work.  To be successful as an investor, you need to develop and maintain similar

attitudes, behaviors and opinions.

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Understanding failure: It is said that we learn more from our mistakes than our

successes. Although success is important, it is equally important to understand

failure and its role in shaping investor behavior. The idea is not to punish or

ridicule something done or gone wrong. But to understand it, correct it and do it

right in the future, so that the rewards of being right may reinforce the winning

behavior.

The weak link: The markets offer fortunes without limit to those who master the

few simple rules of profitable investing. However, the weakest link in the chain is,

has been and always will be the investor himself. The investor would be well

advised not to fall prey to the belief that a better investment and/or trading

system will make you a better investor. The world's best investment or trading

system in the hands of an incompetent, undisciplined and unsophisticated

investor will prove to be a vehicle for consistent losses and disaster. It does not

matter how good your investment or trading system is, as it is you and only you

who can make that system work as it is intended to. To put it into perspective, "It

is not the gun that counts, but the man holding that gun".

Consider an investment or trading system that is so profitable that it makes

thousands in a short period of time. Now, consider a period of "drawdown",

which is a necessary part of the system. This drawdown is what really makes or

breaks an investment or trading system.

If the investor were to limit the drawdown to what they should be, based on the

trading signals generated by the system, then the system would recoup and move

on to bigger and better things. On the other hand, if the investor is undisciplined

and unwilling to accept losses when they should be taken according to the

system; then the drawdown period will either be longer than intended. Further,

the investment or trading system would deteriorate because of the investors lack

of action.

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Thus, the ability of an investor to cope with such periods of drawdown and paper

losses will either make or break a system. No matter how good the system is, the

investor himself is the weakest link in the chain. This lack of action on the part of 

the investor will break the back of the system and of the investor himself quicker

that any unexpected adverse market event. At this point the psychology of the

investor becomes most important; and attitudes, behavior, perceptions and

experience become important factors for success.

Finally, by correctly applying experience and coping with losses, the investor will

either make or break the investment or trading system. There is no

predetermined formula to deal with such adverse situations, but there are

methods and procedures to minimize the degree of investor error; or in other

words to maximize dependence on the investor's response style.

Short-cut to learning: You can learn the various aspects and elements of 

successful investing in many ways.

  You may undergo a long drawn psychiatric treatment that may or may not

have the desired result.

  You could enroll in a success motivation course that may be of some help.

  You can read extensively about investment theory and practice; and

develop your own system, which would include both method and

procedure.

  You may read autobiographies of the great investors and speculators to

reinforce your investment or trading system.

  You could also undertake a course to discover the perfect investment or

trading system for yourself, only to discover later that it does not suit your

style.

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Whichever way you look at it, your focus should be on technique and investor

psychology, as against market methodology or investment system which are

secondary. A good investment or trading system is only 20% of the input for

success. The rest of the 80% would include the following:

  Effective risk management tools.

  A positive mental attitude.

  A personal investor style or psychology.

  Discipline and structure.

  Consistency and persistence.

Visualize, recognize and act: To win the war as opposed to winning one

brief battle, you need to think, see and do; as has already been brought to

your attention above. "You need to visualize opportunities, recognize them

when they appear and most of all, consistently act on them once they present

themselves".

Winning attitudes and behavior: Every signal generated by your investment or

trading system must be considered to be the signal that will produce a vast

fortune. If however, you do not look upon each investing opportunity as a

significant opportunity for profit, then you would allow yourself the liberty to be

dissuaded from acting on the opportunity.

No individual or course or tape or lecture or article can do for you what you can

do for yourself. To develop this winning attitude and behavior you have to work

with yourself and develop your skills by yourself with your own effort. However,

time is at a premium due to its limited availability, so you would have to be

selective in what you study and learn. You should focus on your personal growth

as an investor, with respect to various aspects to ensure that you become a

successful investor.

Every investor has several characteristics that combine to make them successful.

The degree of success depends on how well you can implement these and how

well your strategy works.

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The method investors have for selecting shares that they want in their portfolio is

arguably one of the most important areas of being a successful investor. For me

personally I have stuck to selecting shares that are leading ie blue chip companies,

whose price histories are in a long term uptrend and that are themselves doing

better than the market average.

The next vital component is the trading plan. This doesn’t need to be overly

complex. You just need to know what you will do if the share price goes up, down

or sideways. If you can cover these three things then you have a contingency for

anything the share price can throw at you. And more importantly you will prevent

yourself from reacting to sudden market fluctuations that happen all of the time.

The trading plan should also incorporate an overall strategy for the share that you

have selected and explain the reasoning behind why you’re doing what you’re

doing ie why you decided to place your order level at this particular point.

You will need a robust risk management strategy and to be successful in the long

term you will need to implement the strategy. The number of times I’ve seen

people unwilling to action there risk management plan when the share price

reaches their pre-determined value price is a little bit scary.

The above three things are great to have in place but don’t forget that you must

be disciplined in implementing them otherwise you’re setting yourself up for

failure. And you should remember that to get good at anything you need to

practice and you need to gain experience. Champions are made in training. Not

on the track.

After identifying these strategic factors you should consider how much you are

willing to outlay on each share. It is important to try and spend the same amount

on each share ie $5000 across a portfolio of 10 shares in different industries in

order to maintain a balanced portfolio.

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Finally before deciding to go ahead with any investment you should asses

whether its risk to return is worth it. There is no point risking $1 to try to make 50

cents. Over my investing lifespan I have stuck with a ratio of 1:3. For every dollar

that I am risking I stand to make at least three or if I stand to make $3000 from a

trade then I am willing to risk $1000 in order to make it. The reasoning behind this

ratio is that no matter how good you are you will always loose in some of your

investments. Having a ratio like this ensures that when the of the investments pay

off they more than compensate for any that lose.

To recap any successful investor must exhibit these characteristics over the long

term.

Take responsibility for themselves and make their own decisions. They take the

credit for making profit and accept the responsibility for any losses. They learn

from these decisions and improve over time;

Make investment or trading plans and stick to them They make trading plans

based on reliable information in the clear calm light of day and not emotional

reactions that may emanate from the panic or euphoria of the share market. And,

they stick to their plan;

Assess the Risk/Return Ratio of each trade They only enter into investments that

offer reasonable potential for profit;

Manage the risk of every investment. And never lose too much;

Allow for contingencies in the plan so they know what they are going to do if the

share being traded goes up, down or sideways in price. The share price can donothing else. But you can do what you planned. The plan then dictates the actions

and prevents unprofitable emotional reactions;

Only put their money into financially secure companies;

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Buy shares when they are cheap and sell those that are expensive relative to

their price trends;

Only trade in companies whose prices are in trending up;

Trade unemotionally and have the discipline to trade the plan. They plan the

trade and trade the plan;

Keep taking money out of the market. You only make money when you sell

shares; and

Have sufficient confidence that has been gained from experience.

The game of investment as any other game requires certain qualities and virtues

on the part of the investor to be successful in the long run. What are these

qualities? While the lists prescribed by various commentators tend to vary, the

following qualities are found on most of the lists.

1. Contrary thinking

2. Patience

3. Composure

4. Flexibility and openness

5. Decisiveness

Before we dwell qualities point needs to be emphasized. Cultivating these

qualities distinctly improves the odds of superior performance but does not

guarantee it.

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Traits of the Great Masters:

The strategies employed by great masters (investors) based on analysis is

prepared and given under considering the most common traits:

1. He is realistic

2. He is intelligent to the point of genius

3. He is utterly dedicated to his craft

4. He is disciplined and patient

5. He is a loner

Contrary Thinking:

Investors tend to have a herd mentality follow the crowd. Two factors explain this

behavior. First, there is a natural desire on the part of human beings to be a partof a group. Second, in a complex field like investment most people do not have

enough confidence in their own judgment. This compels them to substitute others

opinion for their own.

Following the crowd behavior however often produces poor investment results.

Why? If everyone fancies a certain share, it soon becomes overpriced. Thanks to

bandwagon psychology, it is likely teaming bullish for a period longer than what is

rationally justifiable. However this cannot persist indefinitely because sooner or

later the market corrects itself. And when that happens the market price falls,sometimes very abruptly and sharply causing widespread losses.

Given the risks of imitating others and joining the crowd, you must cultivate the

habit of contrary thinking. It may be difficult to do because it is so tempting and

convenient to fail in line with others. Perhaps the best way to resist such a

tendency is to recognize that investment requires a different mode of thinking

than what is appropriate to everyday living.

Being a joiner is fine it comes to team sports, fashionable clothes, and trendyrestaurants. When it comes to investing, however the investor must remain aloof 

and suppress social tendencies. When it comes to making money and keeping it,

the majority is always wrong.

The suggestion to cultivate contrary thinking should not, of course be literally

interpreted the means that you should always go against the prevailing market

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sentiment. If you do so, will miss many opportunities presented by the market

swings. A more sensible interpretation of the contrarian philosophy is this: go

with the market during incipient and intermediate phases of bullishness and

bearishness but go against the market when it moves towards the extremes.

Here are some suggestions to help cultivate the contrary approach to investment:

1. Avoid stocks which have a high price-earnings ratio. A high relative price – 

earnings ratio reflects that the stock is very popular with investors.

2. Recognize that in the world of investments, many people have the temptation

to play the wrong game.

3. Sell the optimists and buy from the pessimists. While the former hope that the

future will be marvelous the latter fear that it will be awful. Reality often lies

somewhere in between. So it is good investment policy to bet against the two

extremes.

More specifically, remember the following rules which are helpful in

implementing the contrary approach:

Discipline your buying and selling by specifying the target pieces at which you will

buy and sell. Don’t try overzealously to buy when the market is at its nadir or sell

when the market is at its peak (these can often be known only with wisdom of 

hindsight). Remember the advice of Baron Rothschild when he said that he would

leave the 20 percent gains at the top as well as at the bottom for others as hisinterest was only on the 60 percent profit in the middle.

Never look back after a sale or purchase to ask whether you should have waited.

It is pointless to wonder whether you could have bought a share for Rs 10 less or

sold it for Rs 20 more. What is important is that you buy at a price which will

ensure profit and sell at a price where you realize your expected profit

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Qualities of successful stocksWhat are the qualities that successful stocks of excellent businesses make them

apart from other stocks? What separates the good stock from the ordinary stock?

The answer is not simple. You should do proper research to find out why

particular stocks click in the stock market and why certain stocks do not click.

Financial analysis does play an important role but certain other factors are equally

important.

A leader is not born he is made. This saying goes well with stocks too. A leader in

the market is created mainly be consumers. It is the consumer who holds the key

to the lock (share). The market should accept a particular company and its

product to survive and sustain competition in this fast moving world.

The first and foremost question to be asked is whether the company’s productsand services are needed tomorrow. A company may be a leader in a particular

product in the market today but will that product survive tough competition and

will it last the next few years. Technology and science is changing before we blink

our eyes and so companies should adopt products and services that will not fade

away i.e. will sustain any market conditions.

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A decade ago who would have ever imagined that cassettes and VCR’s would

become extinct and would pave way to DVD’s and CD’s. The television is also

seeing a major revolution and the slim TV is gaining importance. PC’s are replaced

by LAPTOPS. Companies should have products and services which can adapt to

the changing needs of the consumer.

Very strong competitive advantages safeguard strong companies from

competitors. A popular trademark, high cost of entry and heavy manufacturing

costs are some reasons why companies stand out during tough times.

Market leadership is one of the greatest factors which determine a company’s 

share in the market. Market leaders are followed by the others in the industry.

But don’t only rely only on market leaders. Some companies grow slowly and lose

their leadership tag and this brings their share price down. Market leaders have tobe prompt in decisions and should not let competitors overtake them, as once

strong ground is lost; it is very difficult to get back to number one position.

Although financial status and positions hold the first preference in determining

the trait of a company and its shares, there are various other factors like that the

ones mentioned above which determine the quality of a company’s share. So you

should be very careful while picking up stocks of major companies.

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