Wise words from the Oracle of Omaha, Warren Buffett.

“An investor needs to do very few things right as long as he or she avoids big mistakes.”

Unfortunately, it’s much easier to make a big mistake than to hit a home run in the stock market, but avoiding a big loss is doable if you practice certain disciplines and know what to look for.

Establish a Healthy Margin of Safety

No investor has ever been correct 100% of the time, and it is incredibly naive to believe one can make investment after investment without ever striking out.

Margins of safety are difficult to quantify, but they can be easily understood with an example of everyday risk management.

Consider Joe the engineer. Joe has recently been contracted to engineer a new bridge. He is given the task of erecting a bridge able to withstand 75 tons of weight. Do you suppose Joe is going to engineer the bridge in such a way that it will hold only 75 tons and not a pebble more?

Of course not.

Joe is going to engineer the bridge to hold much more than that, building in a margin of safety for any miscalculation.

Joe will probably engineer the bridge so that it will be able to withstand the weight of 100 tons, creating a 25-ton margin of safety.

Now, consider the situation from an investment standpoint. Would you invest in a company trading at $75 when you estimate its worth to be only $76? This leaves you very little margin for error – any slight miscalculation and you just paid too much for the stock.

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We may heard a lot of rumors and news of the company. The fact is we still not sure that it’s true or false. The news for example could be false and misleading. The writers who create the financial news want the most exciting, scintillating and engaging stories possible; their success is measured by the size of their audience base and the reactions garnered. While this coverage can be entertaining, you shouldn’t view it as authoritative.

Most of what we have read and see in the media is noise. It’s not necessarily false, but it may be immaterial. Since the investor are going to own part of a company, we need to focus on the important economic factors affecting your company and its industry, not the hype around it.

Finally we still need to go back to the fundamental analysis to identify the profit margin and cash flow of the company, whether they can sustain and future growth potential. Do they improve the profit margin year by year or maintaining it? So check the financial performance history.

Strategy 1: Don’t “Pick Stocks,” Buy Great Companies at Great Prices

While Googling, I found an interesting stock strategy called “7 Ingredients of Market-Beating Stocks” from Investopedia that I think can be apply to any stock market such Bursa Malaysia. They suggest 7 strategies to success in stock picking and stock trading. This is the first strategy.

While stock market can be irrational in the short term, companies with real products and real profits do create wealth for their shareholders in the long run. So looking for companies that…

• Have strong fundamentals, good management and a profitable (or soon to be) business model.
• Would be attractive to us as business owners.
• Have obvious long-term potential for good returns.

One of the most important characteristics of a great company is a wide economic moat, a defense system that protects current and future earnings from competitive pressures.

Economic moats come in many forms. They are anything that gives a company a competitive advantage. This includes:

• Economies of scale and cost advantages
• High switching costs
• Great management
• A strong brand name
• Superior technology

Whatever it is, an economic moat prevents competitors from stealing market share and allows a company to continue making money throughout a wide range of economic conditions. While looking for strong economic moats, even the company with the widest and most sustainable economic moat may not be a good addition to the portfolio if it’s overpriced!

The problem with trying to find attractively-priced companies with strong economic moats on your own is that it requires three commodities investors don’t always have: time, independence and effort.

Time – Wealth isn’t built overnight. It takes the right mixture of patience, committed effort and strategic guidance to keep your investing on track over the long term. Unfortunately, many individual investors flock to the latest “guaranteed stock-picking machine” or the next “can’t-miss strategy that takes only minutes a day” in the hopes of getting around their lack of time.

Independence – We may not depend on what media has reported or what analyst said, but we must be if we hope to be unbiased and independent.

Effort – The consequence of investing independently is that it requires tedious effort to find quality companies that fly under the radar of Wall Street’s media and analysts. This isn’t easy, but when you do, it can really pay off.

So buy a good company at the right timing and right price. Don’t depend too much on rumors, news and analyst. Take some time to do your own research.

Stop loss may not strange for professional investor but if you don’t know, you better check it out. This strategy might reduce loses and it’s some kind of free insurance policy. Check with your remiser whether you can put a stop loss.

While we always make a decision based on emotion, the stop loss can help us to prevent our emotion to control our decision. Putting stop loss when trading called Stop Loss Order. It’s depend on the stock itself but normally stop loss level under 10% of the stock price. Stop loss level shouldn’t decline but should be increase if the share price increase. For example: you bought one lot ABC share at RM1.00, the stop loss should be 90 cents if we based on 10% stop loss level. But if the share price increase to RM1.20, the stop loss level now increase to RM1.08. Meaning that if the share price of ABC drop until RM1.08 or below, you must sell it immediately to avoid more loses. Stop loss doesn’t mean you’re losing money.

This stop loss strategy is design to help you not to fall in love with your stock.

Try the stop loss calculator.