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JSE/Liberty Staff Investment Challenge. June 2011. Setting your Investment Strategy. Consider your goals and time horizon Watch out for inflation and costs Be honest about your risk tolerance: Investing involves risk No pain, no gain Know what you know What not to do: Don't follow fads
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JSE/Liberty Staff Investment Challenge June 2011
Setting your Investment Strategy • Consider your goals and time horizon • Watch out for inflation and costs • Be honest about your risk tolerance: • Investing involves risk • No pain, no gain • Know what you know • What not to do: • Don't follow fads • Don't be satisfied • Don't lose money
Investing or Trading to Success? The primary difference between trading and investing is your time horizon. • What trading attempts to predict is the near term behaviour of other traders • Short-term traders attempt to buy low and sell high, not focusing as much on company fundamentals as long-term investors tend to do • Investors look to find and hold successful businesses and earn returns from earnings distributions
Understand how your emotions affect your investing Some common psychological traps to avoid: • Prospect theory (risk versus reward) • Loss Aversion (fear losing greater than appreciate gaining) • Status quo bias(tend not to change accepted behaviour) • Gambler's fallacy (observations are based on prior trials) • Anchoring(rely too heavily on one piece of information) • Confirmation Bias (find information supporting our view)
So if you want to win (be a short term trader): • Don’t diversify your positions • Stick to one type of bet • Trade regularly on perceived emotions and ignore fundamentals • Keep concentrated positions • Think about your entry and exit points, ignore the long term • Listen out for the latest stock tip or fad • Worry about yesterday’s stock movements Exactly what you would not do when saving for a long term goal