How To Be Smart In A World Of Dumb Investors

Did you know most investors don't make money in the stock market, even when they're handed proven winners? Take Warren Buffett, for example. Every year, millions of investors try to mimic his portfolio, buying the same stocks he owns...

...and yet they don't see the same returns (and they're obviously not as rich).

Buy, why?

The short answer is: they're making dumb mistakes and blindly following without thinking.

Here's what you can do differently.

Be Mindful Of Position Sizing

Investors who fire their investment advisor often turn around and buy into an investment newsletter without understanding how they work. Or, they try to mimic a successful investor's portfolio.

If you want to be successful, you need to match the successful model portfolio exactly -- both its stock recommendations and its position sizing. Position sizing refers to the amount of money being invested.

A publisher's (or guru's) model portfolio is usually too big for small investors though -- they either can't buy everything the publisher or guru recommends or owns, or they can't match the weighting.

For example, if a publisher recommends putting $50,000 in 50 different stocks (in varying amounts), or the guru has billions invested, but the investor only has $20,000 to invest, obviously he can't follow that portfolio. Sometimes, an investor decides to pick and choose stocks out of the model portfolio based on what he thinks are "safe bets" or stocks with the greatest potential.

That's a mistake.

If you can't match a model portfolio's position sizing exactly, then you probably won't get the same results. Ditch the newsletter's (or guru's) portfolio and find a good model portfolio you can match.

Buy Value, Not Price

People who speculate on the market by following trends are not real investors.

They're speculators.

One of the greatest investors who ever lived, Philip Fisher, taught investors to pay attention to the business, not the price, of a stock. He once famously wrote:

The stock market is filled with individuals who know the price of everything, but the value of nothing.

Fisher thought that owning good businesses was the key to successful investing. He spent considerable time figuring out whether a company was fundamentally sound before he bought it. And, when he decided a company was a good buy, price was a secondary consideration (if it was a consideration at all).

Consequently, he would sometimes buy stocks that others thought were overvalued or "expensive."

Did it work?

Well, one of Fisher's most famous investments was in Motorola -- a company he held for 20 years, and which increased 20-fold in those two decades. This was compared to the seven-fold increase in the broader stock market.

Fisher was a fan of holding his investments for a very long time, saying:

If the job has been correctly done when a common stock is purchased, the time to sell it is almost never.

Spend Years Honing Your Skill

Investing requires skill. A lot of skill.

There's a reason why people like Warren Buffett, Peter Lynch, and Carl Icahn have been successful over many years and it's not luck. They didn't have someone feeding them the answers every year.

Neither can you.

You have to roll up your sleeves, study the companies you're investing in, and make good judgment calls about whether the company is a good long-term investment. You may never be a Buffett or Fisher, but you can certainly earn enough to secure your own financial future.

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Author Bio: David C. Lewis, RFC, teaches business owners how to double their profit margins using insurance-based financial planning. Grab his free financial tips and an exclusive PDF copy of The xLetter by visiting www.monegenix.com