Base investment decisions on their FVP
Continually do your homework on the FVP of shares, buy the fairly-priced and underpriced assets and sell the overpriced assets in the portfolio. Buy value shares as opposed to growth shares. Earnings are the most significant element in investments: a number of the valuation techniques take earnings into account.
In this regard Dave Foord50 states: "All the valuation methods are good and should be used. They provide a one dimensional number or valuation that can then be compared to the market price and a ranking table of alternative investments. But this is not nearly enough. Two crucial aspects must be taken into consideration. First, the quality of the business and its life expectancy should be used to judge the quality of earnings. Second, the ability of management should not be overlooked. The range of management ability is wider than most people think and these people are the custodians of the wealth of those who invest in the company. Management needs to be trustworthy and capable of handling the risks and identifying and acting on opportunities. Good judgment is required to make good investment decisions."
Never fall in love with an investment
Allied to the aforementioned is the important maxim "never fall in love with an investment". If an investment is performing poorly, sell it, and remember the well-used maxim: "the first loss is the best loss".
According to Dave Foord51: "We all make mistakes. Investment mistakes are expensive. Stubbornness is not a good personality trait in this situation. In investing, the errors come fast and furiously, which is strange, really, in a binary environment (there is only buy or sell and up or down). So you need to be able to recognize mistakes early and then act to limit the damage. 'Pay and the pain goes away' is a good motto that has often worked for us in these situations. We believe that a major part of Foord's success has come from risk management and, in particular, managing the risk of being wrong. How you manage your mistakes will have a big impact on your investment result."
Do not be led by technical analysis
Successful long-term investors do not rely on technical analysis (TA) as an analysis tool. TA can be relied on for short-term gain only, because in the long-term intrinsic value (FVP) counts. TA only works because of the existence of other technical analysts, who generally come to the same conclusions and act on them. It is self-fulfilling in the short-term.
Be cognizant of behavioural finance (the psychology of the market)
Be cognizant of the fact that markets over-react and under-react to FVP (mean reversion: see below). This can be taken advantage of, and is by the investments professionals. Individual investors should only take advantage of this phenomenon if they are full-time investors. Full-time investors develop a "feel" for the psychology of the market.
In this regard Dave Foord52 states: "Long before it became in vogue, it was evident to us that human behavior made markets irrational and inefficient. If more than 75% of people believe they are above average at a particular task, then a third of those people are wrong. So study human behavior. Change is a constant in the markets and people resist change; the older people get, the more they resist change. One path to success is to be ahead of the curve of change. This is often a solo achievement as teams and committees tend to resist change.
Appreciate market liquidity
Market liquidity refers to the extent of turnover in a share (or a market), i.e. the extent of buy and sell orders in a share, and price discovery is linked to it. Never invest in a market or share that has low liquidity, i.e. poor price discovery, because of the lack of ease of buying and selling when desired. Small deals can have major price-effects in low liquidity markets. There is a reason for a share having low liquidity: the share does not have the attention of the professional investors.