How to become a better investor

HOW TO BE A BETTER INVESTOR.

First of all you need to understand the different types of investments

Stocks
You are investing in businesses, if you invest in shares. These could be small, medium, or massive businesses in the U.S. or around the world. You are given part ownership in a company by purchasing stock. That is why you should only buy stocks in companies you think can succeed – and believe in.

Stocks are bought and sold in components known as stocks. If they believe the company will be successful people will pay cash. When it is, its stock will increase in value. The company will pay its investors a dividend. That is when the shareholders are paid a part of its profits by the company.

Investing in stocks can be risky because their value can change from day to day. But stocks may have great potential for expansion and overall yield.

Mutual funds
A mutual fund is a set of cash from a group of investors. Rather than deciding exactly what shares or bonds to buy, a fund manager makes these choices for everyone in the group – deciding if, and what to purchase or sell.

Some mutual funds will probably be greater risk than other people, and no mutual fund is a sure thing. But because the fund invests in a number of bonds, stocks, and other products, there is usually greater reward than many low-risk investments, and less danger than purchasing a few bonds and individual stocks.

Bonds
Businesses, governments and municipalities issue bonds to raise funds. With attention the bond owners are generally repaid by them in return. In this manner, there is a bond similar to a loan. When you purchase a bond, you are lending money to the authorities for a period of time or to a company. The bond certificate is a promise in the company or government that they will repay you to a specific date, usually.

Bond terms can range from a few months. The longer you maintain your investment in bonds, the better the yield — so consider bonds a long-term investment.

The objectives of investing in bonds would be income and the potential for future and stability income.

Government bonds have been low-risk because they’re backed by the U.S. government. Corporate bonds, though, have a higher potential risk. Before you spend to make certain it’s the capability to repay the loan, you need to research the company.

Low-risk investments
Low-risk investments enable you to earn interest on your money while keeping some liquidity – in other words access . Of losing your cash through these 9, the likelihood are really low, however they have reduced return compared investments like stocks.

Here are two common examples of investments which fall into the low-risk class:

With CDs, you agree that you will not get the cash that you deposit for a particular period of time (in the few days to a few decades). Normally, the longer you keep your cash in the account, the greater your speed of return.

A Money Market Deposit Account (MMDA) is a kind of savings account which needs a larger balance than CDs or regular savings account, usually $10,000 or more. MMDA accounts offer a better interest rate and make it possible for more flexible access to you to the money in your account.

Real estate

A lot of people invest in real estate, such as a house or property. One positive aspect to investing in real estate is that it increases without the ups and downs that happen in the stock market in value over time. When you sell real estate like shares, you earn money. Bear in mind that there are costs involved in purchasing, selling, and owning real estate, and that it can take time to sell a house or home.

For a not-insignificant percentage of investors, it’s about temperament and emotional reaction. Despite their best intentions, they are, without a doubt, their own worst enemies, destroying wealth through sub-optimal decisions and reactions that are based on feeling rather than fact.

I believe certain things can help an investor better understand the purpose and nature of the capital allocation process. Although these tips can’t guarantee results, my hope is that by highlighting and discussing some common errors and overlooked mistakes, it will become easier for you to spot them in the real world.

Avoid Investing in Anything You Don’t Understand
People seem to forget this basic truth if they aren’t reminded. I prefer to distil it down into a handful of statements that can serve you well if you keep them in the back of your mind.

You don’t have to invest in any one specific investment. Don’t let anyone convince you otherwise. It’s your money. You have not only the power to say now, but the right to do so, even if you can’t explain your reasoning.
Plenty of opportunities will come along in life. Don’t let fear of missing out cause you to do foolish things.
If you or the person managing your money can’t describe the underlying thesis of an investment — where and how the cash is generated, how much you're paying for that stream of cash, and how that cash will ultimately find its way back into your pocket — then you aren’t investing. You’re speculating. It may work out in your favor, but it’s a dangerous game that is best foregone or, at the very least, restricted to a small, isolated portion of your portfolio that does not involve the use of margin.

Becoming a better investor is as much about temperament and frame of mind as it is intellect.
Learning to manage your money and build an investment portfolio can be a difficult task for many new investors. For some people, it’s simply a matter of not having time to give proper attention to the way their wealth is invested and the risks to which they're exposing their hard-earned savings. For others, it comes down to a lack of interest in investing, finance, and money management. These folks might be smart, hardworking and even brilliant in other areas of life, but they prefer to do anything else rather than talk about numbers and figures — they don't want to dig through annual reports, Form 10-K filings, income statements, balance sheets, mutual fund prospectuses or proxy statements.

For a not-insignificant percentage of investors, it’s about temperament and emotional reaction. Despite their best intentions, they are, without a doubt, their own worst enemies, destroying wealth through sub-optimal decisions and reactions that are based on feeling rather than fact.

I believe certain things can help an investor better understand the purpose and nature of the capital allocation process. Although these tips can’t guarantee results, my hope is that by highlighting and discussing some common errors and overlooked mistakes, it will become easier for you to spot them in the real world.

Avoid Investing in Anything You Don’t Understand
People seem to forget this basic truth if they aren’t reminded. I prefer to distil it down into a handful of statements that can serve you well if you keep them in the back of your mind.

You don’t have to invest in any one specific investment. Don’t let anyone convince you otherwise. It’s your money. You have not only the power to say now, but the right to do so, even if you can’t explain your reasoning.
Plenty of opportunities will come along in life. Don’t let fear of missing out cause you to do foolish things.
If you or the person managing your money can’t describe the underlying thesis of an investment — where and how the cash is generated, how much you're paying for that stream of cash, and how that cash will ultimately find its way back into your pocket — then you aren’t investing. You’re speculating. It may work out in your favor, but it’s a dangerous game that is best foregone or, at the very least, restricted to a small, isolated portion of your portfolio that does not involve the use of margin.

A tremendous amount of pain and suffering can be avoided when these basic three tenets are honored. Don’t dismiss them because they sound like common sense. As Voltaire succinctly and accurately observed, “Common sense is not so common.”

Understand That Market Value and Intrinsic Value Are Different
Imagine that you bought an office building in the Midwest, paying cash with no mortgage debt against the property. Your acquisition price was $1 million. The building is in a great location. The tenants are financially strong and locked into long-term leases that should ensure that rental checks keep flowing in for many years. You collect $100,000 a year in free cash flow from the building after covering things like taxes, maintenance and capital expenditure reserves.

The day after you buy the building, the banking industry collapses. Investors can’t get their hands on commercial mortgage loans and, as a result, property values become depressed. Over the subsequent year, buildings that sold for $1 million now go for only $600,000 because the only people who can afford to make acquisitions are cash buyers.

There's no doubt in this scenario that if you were to try to sell it, the likely market value of your property would be much less than the price you paid.

You might get $600,000 should you dump it on the open market. You might be able to get a much better price if you're able and willing to carry a privately-negotiated mortgage on which you effectively act as the bank for the buyer, who keeps diverting a portion of the rental income in the form of interest on the mortgage note to you after you’ve sold the building on which you now hold a lien. Nevertheless, if you were able to pull up quoted market values on your real estate investment, you’d be down in a very significant way on paper. It would be brutal.

For long-term investors, this is not particularly meaningful because true investors in the words of Benjamin Graham, the legendary father of value investing, true investors are rarely forced to sell their assets. Instead, they’ve run their finances conservatively enough that they can sit on depressed valuations for years at a time, knowing that they are still earning a good rate of return when measured as the cash flow that belongs to them relative to the price they paid for their ownership stake.