Maybe you dabble in stocks by reading the business section of your local newspaper. You’ve begun to think about managing some of your own capital through a brokerage account on your own. Is this a wise move? Here are some questions to ask yourself before making that very important decision.
Grab a piece of paper and write down the investment principles by which you operate your portfolio and the characteristics you look for in the stocks you buy. If you had to think about your answer, you may be making a mistake by managing your own investments. It may indicate that you lack a structural framework that allows you to remain emotionally detached from your investments – a detachment that is vital if you are to make intelligent decisions based upon rational analysis of a business rather than emotional reactions to market changes in market prices. On the other hand, if you are truly an investor this exercise should take no effort or time. That’s because you think from a business perspective. As someone of the Graham and Dodd school of value investing, for example, I’m aware that stocks with certain characteristics such as low price to earnings ratios, low price to book values, high returns on tangible capital, low debt to equity ratios, and stable dividend policies have tended to outperform the market over long periods. These things, among others, are what I search for when I seek out potential new investments. The list may vary by your specialty and area of interest – turnarounds, start-ups, oil companies, etc.
