For any investor, the time he fixes a goal in mind, his investing life cycle starts. Rest of his activities involves going through each stage of this cycle and end the journey at the time he is achieves the goal by selling the stocks. With or without knowledge, no investor would be able to avoid any stage of this process. A through awareness on each stage of this life cycle, helps investors to have a quick self checkup and rectify any possible errors with any of these stages.
Generally, process of creating wealth through investing on stocks moves through the various stages:
Investing Goals >>> Acquiring Knowledge >>> Identification and Analysis of business >>> Time of investment >>> Holding Period >>> Identification of selling time
This is known as the the preliminary stage of this cycle. It clearly tell us the important requirement of setting goals to achieve through investing. Any value investor, cannot become a right investor if he or she is investing in businesses without any goal. Goal setting is the core of the investing life cycle. Investors generally set goals for short, medium and long terms but, for a value investor, who believes the rule of long term wealth, generally sets long term goals by considering the nature of stock investing profit possibilities. Any one who has short or medium term goals, I cannot advise investing in stocks by going these rigorous steps instead, should identify parallel methods.
Acquiring Investing Knowledge
No investor is perfect if he doesn’t have enough knowledge on investing. For a value investor, one should first have required skills to analyze the qualitative and quantitative parts of any business in order to identify the suitability to invest. With the help of quantitative analysis skills, one can easily identify the earning potential of a business for a period and with qualitative analysis skills, one can identify best businesses to invest in.
Identification and Analysis of business to invest
This is the most critical stage in our investing life cycle. This cycle can decide whether an investor is able to meet the goals or not. In this cycle, an investor is required to identify the right business to invest and meet his goals. Any mistake in this stage can be prove costly to any investor by not providing an intended result or loss of money. Its nature of such importance has made this cycle as the most important one among others.
Time of Investment
Deciding the right time of investing to stock has a lot of importance. By remembering the rule “Whatever you pay to buy, always decide your rate of return”, an investor should aware whether he should buy a stock at a particular time or he needs to wait some more time. To overcome the problem of deciding or understanding the right time to buy, one should keep an eye on macro factors that have the influence to decide the movement of any stock market up or down. Some of the examples for these factors are: economic recessions, industry recessions, temporary bad news about a company, major events in a nation like general elections etc..
If you take the word from Warren Buffett, his holding period is forever!! Most of the investors who heard this word today, may laugh because of the foolishness of holding a stock for a long time. If you are one among them and laughing, then you are just forgetting the third stage of this life cycle “Identification and Analysis of business to invest”. If the businesses selected by Warren Buffet are capable to give enormous wealth through out the holding period, whether it is short or long, why should Warren sell such stocks? To have high success with this cycle, an investor is required to select the businesses that are able to give wealth throughout the holding period.
Identification of selling time
Identification of selling time is the most crucial part of investing life cycle.This is a stage that can really test the patience and personal qualities of an investor from the very next moment after investing in a stock. As a value investor, one should have necessary information on selling time and possibilities. Reading great investing guides from Benjamin Graham and Philip Fisher will help you to identify the exact time to sell a stock.
[The article has been contributed by Sherin Dev.He is an IT Engineer, Investor and Writer with MoneyHacker Blog which covers topics on savings and investment, personal finance and money management.]