Outsmarting the Crowd summary

If you’ve ever read the financial news, you’ve probably been bombarded with information, both enthusiastic and catastrophic. You see headlines like “Google shares hit record high” or “Oil prices collapse.” Some investors become quickly distressed trying to keep up with the media craze.

But sound investing is about rationality, not emotions. Say you own stock in Starbucks and read in the paper that the company’s valuation fell by 10 percent in just one day. Your emotions may urge you to sell your shares to avoid getting caught on a sinking ship, but don’t listen to them.

You might have dreams of getting rich overnight, but even the most successful investors like Warren Buffett didn’t make their fortunes so quickly.

In fact, being a good investor is all about cultivating patience and discipline, so take it slow. Rushing investment decisions is a sure way to fail. The truth is, it often takes months, even years, for an investment to turn a profit.

Knowing when to break from the crowd is essential to good investing, and the most effective way to outsmart other investors is to build up your knowledge every day. But before you do that, you’ll need to know where your investing competencies lie.

Warren Buffett, one of the most successful investors on Wall Street, often cites the concept of a circle of competence. The idea is that it pays to know what you’re good at and to stick to it.

It might seem ingenious to come up with a complex investment strategy, but the truth is, real wisdom is about keeping things as simple as possible. So just focus on what really matters.

After all, there’s a nearly infinite number of criteria to consider when assessing a company: brand image, financial performance, the management team’s charisma – and the list goes on.

There are literally thousands of companies whose stocks are traded on the market. To separate the winners from the losers, investors need to know how to ask the right questions.

When looking at a stock, it’s best to act like a five-year-old and never stop asking questions such as: Why do people like or need the company in their lives? Why do they consume its products? Is the company selling a revolutionary innovation or is it a trendy start-up that’s going to fade away?

Today, financial markets are prone to drastic drops and spikes. These changes can be caused by mood swings prompted by the overexcitement and exaggerated disappointment of investors.

That’s because, today, investors are taking in too much information, gossip and rumors from the media. They overreact to this information overload by buying and selling too quickly. As a result, investors today hold on to their stocks for exceedingly short periods of time.

Investing might seem like it’s all about making more money, but the truth is, good investors make it their priority not to lose money. The best way to do this is to buy cheap.

When you buy a high-priced stock, you expose yourself to potentially huge losses if the price plummets. Obviously, this damage is reduced if you go with cheap stocks.