Professional investors frequently fail to beat the market. The reason for this is that the market is incredibly difficult to predict. For this reason, casual investors are usually advised to invest in tracker funds. This means that you’re buying into a bundle of companies rather than betting all your money on the performance of one particular company.
However, there will be casual investors who wish to purchase individual shares, perhaps for the thrill of trying to beat the market, or because they believe they can generate exceptional returns. If you decide to go down this route, then here are some things to consider that may improve your chances:
1. Decide what you want from your purchase? Is it just high capital growth? Or are you more interested in income from dividends? Or a combination of both? What is your attitude to risk?
2. Be consistent in your choice of companies. If my goal is to generate exceptional income returns, then it probably doesn’t make much sense to buy into a start up company whose capital is going to be taken up in expansion.
3. Do your research. Read up on investment strategies, and gather as much information as you can about companies that you’re considering.
4. Choose companies whose businesses you understand. Warren Buffet is considered by many to be the greatest investor ever. One of his key principles of buying shares is that it should be simple to understand how they make their money.
5. Look for industries where there are high barriers to entry. i.e. this will make it difficult for new players to come in and steal market share.
6. Look for companies whose share price has been marked down due to factors that you consider to be short term. e.g. UK banks are currently quite cheap on the back of concerns over sub prime lending. Some of the banks have announced interim results that show they have a low exposure to this risk, yet the whole market continues to be marked down.
7. Look for companies where the senior management are purchasing shares. Ownership of their own shares is a sign, hopefully, that they are committed to the company and have an expectation that the purchase of their shares will be a good investment.
8. Invest for the long term and don’t get spooked by short term price fluctuations.
Share prices go up and down. That’s a fact of life. These fluctuations often have nothing to do with the company’s performance. If you believe in a company, then stay invested. If the overall market has fallen, but the company’s results are still good, then this may be an opportunity to purchase more shares rather than selling.
9. Invest small to begin with. There is likely to be a learning curve in trying to pick shares that beat the market, so don’t invest all your spare money into the first share you buy!
A useful reference source for those interested in buying shares is www.fool.co.uk . It has information on investment strategies and some of the great investment gurus, plus discussion boards, and the ability to sign up for a share tips service.