Everyone would like to be a better investor. Even the great Warren Buffet admits making mistakes. So I've come up with four simple steps that can help all of us:
1. Think twice before you leave your comfort zone.
It's oft said that you should only invest in what you know and understand. I'm sure an awful lot of investors who had money in collateralised debt obligations (CDOs) wish they'd bought something they understood. Those investments were so ferociously complex that many financial planners I have spoken to didn't even understand them. Some took a wide berth for this reason.
There are arguments which have some validity in them that:
- you employ a fund manager or financial planner to understand your investments. Providing you can trust your advisers 100% then this could be an alternative
- you can learn about investments you don't understand. This is also a good option and I look at it more in point four below.
2. Go against the grain.
Think different. Following the less travelled path will lower your risk and give you the opportunity to outperform – Joe Mansueto, founder of Morningstar.
The herd instinct is alive and well in investing. But that often ends in disaster. It's worth noting that investors such as Warren Buffet view themselves as "contrarians". That means that instead of going with the consensus they think for themselves. The mantra of the contrarian investor is: "Be where the rest aren’t". Contrarianism can unearth real bargains. The logic is that if everyone is piling into property or tech stocks, as they have in the past at times, then a crash (or correction if you prefer) is as inevitable as night and day. A contrarian, on the other hand realises by buying unpopular investments wisely he or she will be in first on the next trend.
3. Analyse your failings and face them head on.
Reflection is a good thing. It may be that you've made a mistake and lost money. In this circumstance it's worth taking the American approach where making mistakes or even becoming bankrupt are good learning opportunities and may be necessary to succeed in the long run. Famed investment author Robert Kiyosaki has failed businesses behind him, but now earns millions of dollars a year from his books, investments, and other businesses. Read this article for some of the common investor failings.
Financial education is a lifelong process and there is always more to be learned. Some of the best investors around read voraciously to improve their knowledge. As well as buying a book or two it's worth putting time aside regularly to continue your financial education. You can learn more by:
Do you have any handy hints on how to be a better investor?