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Create a game plan

Planning is the first step for any investor. Professional portfolio managers and investment advisers often offer new clients a questionnaire to create a formal Investment Policy Statement (IPS). This statement outlines the client’s risk tolerance, risk capacity, preferred assets, growth targets and retirement goals.

If you’re not working with an adviser, you could always take a generic questionnaire online to create your own plan.

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Cultivate high quality sources of data

Knowledge is essential for any good investor. Warren Buffett once claimed he read 500 pages everyday while Mark Cuban claimed to spend three hours reading on a daily basis. However, with all the information available to investors across different mediums, it’s easy to get overwhelmed or misinformed.

A concerning 69% of young Americans have encountered financial advice on social media but only 31% have verified the experience and credentials of content creators supplying this information, according to a survey by Forbes Advisor.

For better outcomes, it’s essential to cultivate high-quality data sources such as established publications, investors with a real track record and newsletters from industry professionals. The use of sophisticated data tools, such as Koyfin, YCharts, Bloomberg Terminals or FactSet could also be helpful.

Test your hypotheses

Most investors have a hypothesis or a prediction for the future. They believe a certain stock is likely to outperform or certain products and services are likely to succeed. However, the key to being a data-driven decision maker is to test your hypothesis, according to Harvard Business School.

For instance, if you believe a certain brand is likely to perform better than another brand, it’s essential to keep an eye on the market sales data to see if there’s a shift occurring. Look for statistics or surveys of consumers about which brand they prefer and why.

Frequently testing your hypothesis is likely to lead to more pragmatic and well-informed decisions.

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Focus on valuation

Once you’ve collected data and narrowed down a stock based on your tested hypothesis, it’s time to see if the market price is justified. There are many ways to calculate the intrinsic value of a stock, but many professionals rely on either valuation multiples (such as a price-to-earnings ratio) or discounted cash flow analysis.

Mastering these valuation techniques is a key part of good investing.

Margin of safety

Buffett has often talked about his focus on a “margin of safety” for all his investments. Because the future is unpredictable and unknowable, the Oracle of Omaha likes to buy companies for significantly less than they’re worth. This limits the downside risk in case he’s wrong and the stock tanks.

For regular investors, this means going through all the steps outlined above and arriving at a justified price for a stock and attempting to buy it for 10% or 20% less. The size of the margin depends on your risk tolerance, but Buffett says investors should “try to be as realistic as you can” during the valuation and conservative with the final margin of safety.

Stick to it

Finally, it’s important to highlight that Shaq says he spent seven formative years of his life failing before he figured things out. That time — and the consequences he dealt with for just snapping up every deal offered to him — no doubt drove home the importance of doing his homework.

But as with most skills, learning to invest wisely takes practice. If Shaq hadn’t kept trying to improve, sticking to his plan and refining it over time with his gained experience and insight whenever the opportunity presented, he likely wouldn’t be where he is now. And at 52, no doubt he’s going to be making it rain still in 26 years from now.

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Vishesh Raisinghani Freelance Writer

Vishesh Raisinghani is a freelance contributor at MoneyWise. He has been writing about financial markets and economics since 2014 - having covered family offices, private equity, real estate, cryptocurrencies, and tech stocks over that period. His work has appeared in Seeking Alpha, Motley Fool Canada, Motley Fool UK, Mergers & Acquisitions, National Post, Financial Post, and Yahoo Canada.

Disclaimer

The content provided on Moneywise is information to help users become financially literate. It is neither tax nor legal advice, is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. Tax, investment and all other decisions should be made, as appropriate, only with guidance from a qualified professional. We make no representation or warranty of any kind, either express or implied, with respect to the data provided, the timeliness thereof, the results to be obtained by the use thereof or any other matter. Advertisers are not responsible for the content of this site, including any editorials or reviews that may appear on this site. For complete and current information on any advertiser product, please visit their website.