10 Secrets of the Most Successful Amateur Investors

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An oft-quoted statistic holds that 80% of professional fund managers underperform the market. That's one of the reasons many financial advisers counsel investing novices to park their money in index funds -- because if the pros can't beat the market, how can a small investor have any hope?

Matthew Schifrin, the investing editor of Forbes magazine, had a different idea. He hunted down 10 of the best-performing amateur investors over the past 10 years and asked them how they managed to beat the market when so few others were able to. He has compiled their investing secrets in a new book, The Warren Buffetts Next Door: The World's Greatest Investors You've Never Heard of and What You Can Learn from Them.

Schifrin is the first to acknowledge that these aren't average investors, but they are average guys (they're all men) who have shown extraordinary talents for picking winning stocks. Schifrin believes that while ordinary investors may not succeed as well as his mini-Warrens, they can still improve their stock market performance by following some of the tactics used by these top performers.

"You may never be able to get 30%-plus per year, but if you pay attention to your investments and take the time to research stocks and the market, I do believe you can wring a few extra percentage points out of your portfolio," Schifrin says. "So instead of the 8% everyone says you can expect, you can get three extra percentage points. I do feel that's attainable for the average investor."

Here are 10 investing ideas that proved profitable to some of Schifrin's fortunate investors. But, he notes, not all of them shared the same techniques, and some espoused contradictory views from each other.

1. A concentrated portfolio can succeed. Diversification is the mantra of many investment advisers, but many successful investors concentrate on a small number of stocks. "If you've done your homework and you really understand the stocks that you own, then diversification really isn't that important," Schifrin says. "People diversify so much they diversify their returns away."

2. Buy low debt-to-equity stocks.
The percentage should be below 50%, according to Schifrin's stars. These successful investors don't like seeing a lot of leverage on company balance sheets. "We came through the meltdown and saw that companies that were dependent on commercial paper or leverage to survive really dropped fast when the banks stopped lending," he notes.

3. Don't be lulled by dividend payments. A high dividend can often lead you to believe a stock is a good buy when it really isn't, a problem known as a value trap. For example, the bank once known as Washington Mutual paid a high dividend right up until it crashed. "Make sure some catalyst in the future isn't going to make that dividend go away," Schifrin warns.

4. Don't accept company's figures unquestioningly.
One of these dedicated investors carefully analyzes all of a company's financial statements, including cash flow, tax credits and operating loss carry-forwards, and tosses out fictitious "assets" like goodwill and brand value. "Be careful to strip out a lot of things that aren't significant earnings-producing assets," Schifrin says.

5. Avoid story stocks.
This was one piece of advice about which there was strong disagreement among Schifrin's group, but he recommends it. The idea: Stick to statistical analysis and don't be moved by the hottest chat room gossip. "Don't be swayed because a company has an awesome electronic gadget or device," Schifrin says.

6. Have some kind of sell discipline.
The investors described in the book take different approaches to this, but all have a system for determining when to sell. One uses a ratio of intrinsic value -- an adjusted forward earnings estimate multiplied by a conservative market multiple -- relative to price. When a stock's price rises to the point where its intrinsic value to price ratio is below 1.25, he sells. Another simply sells when stocks fall 20% from their high.

7. Seek out promising companies that are undervalued because of temporary setbacks.
These investors look for stocks that are mispriced because of irrational selling or buying. A bad news story about a drug trial might slam a company's stock, for example, but not be significant in the long run.
8. Don't get too greedy. While some investors wait until their stocks rise 10-fold before selling, others are content to sell after a few-point gain. The lesson: Take profits. Too many investors ride a stock up, only to ride it back down again. If a stock goes against you, don't hold on: Sell.

9. Seek out companies with monopolies and duopolies.
These are companies that have what Warren Buffett calls a moat -- a high cost of entry for competitors trying to muscle their way into the business. Example: Mastercard (MA), Visa (V) and American Express (AXP) own the credit card business, and it's very difficult for new rivals to get a toehold. In the food business, Swiss giant Nestle is hard to beat.

10. Avoid companies with high short interest.
When hedge funds are piling into the market betting against a company, there may be a lot of negative information about to become more widely known that could damage the stock. Why tempt fate?

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ronsjigslures123

The hunt brother thing is all togeather different than it is today, China was not a industril nation back then and silver was not used widly in the electronics industry like today and in the will be in the future, and back then when the hunt brothers made it spike to 50 bucks a oz it was a LOT cheaper to get the ore out of the ground than today. Here,s SPOT SILVER in a 10 yr span. 1/01/01 ,approx. 4.25 a oz. ,, 02/01/11 approx. 30.86 per oz. , now here,s where charts tell the story of future silver.

January 03 2011 at 1:05 AM Report abuse rate up rate down Reply
ronsjigslures123

When i said to a couple of my friends im buying some Ford when all the trouble hit the industry, they said you will loose your shirt and get a neg. return, well i looked that they didn,t take a hand out and the way people acteded to the GM thing and others and said this company WELL HOLD THE RESPECT of the public and they will buy the cars and trucks, so i bought as much Ford as i could stand, and at same time bought a bunch can soup company stocks and bought a bunch of more USA silver egals, and canada maple leafs ( the purest silver) ALL AT LOW PRICES and guess what my freinds are saying now ... oh i wish i bought a lot more Ford, and silver .. guess what its to late to buy at low prices, that i bought for.

January 03 2011 at 12:32 AM Report abuse rate up rate down Reply
ronsjigslures123

The most sussesful investors are people that do not read the charts and take them to heart, there is to many wrongs with the charts and it holds investors to only one kind of investing. A good investor reads the people and the goverment, and looks at the way companys are run, and some take advise from a far out scorce that really most people won,t listen to, hunches and gut feelings and to be able to feel the way things are turning is the way to good investing. Charts are ok so some of it but the rest has to do with gut feeling and most of all reserch, and always look at history it always repeats its self ALWAYS, ALWAYS, and i repeat ALWAYS. History is the biggest insight and crystial ball that anyone could ever have to make sound finacial disions on. When silver years ago hit over 50 bucks a oz. it was increditable and tons of people and countrys made fortunes on it, those that stayed invested in silver and gold little buy little knowing that history always repeats itself are making tons of profits today many tons of money, thats just one example. When silver fell it sold at $2.50 to $6.00 a oz, those that bought and pilled it away and selling today at 33.00 bucks a oz. are making a lot of profit a oz. , gold was the same, and pladdium was the winner could have bought it cheap back then, Here,s the way i thought well if i buy 1000 pounds of 99.9 fine silver coins for 3.00 bucks each and stack them in a bank box and they don,t get any higher than 5.00 each well i still made some thing when i retire, then on the other hand if it goes up to 20 bucks, 30,40, bucks each coin well i will retire with a heck of a chunk of CASH on my investment. So what i have to loose, nothing but gain to gain 1/2 million bucks. A lot of you young investors don,t even remember when CD,d paid 17,18,19,20% return. Those were the days.

January 03 2011 at 12:15 AM Report abuse rate up rate down Reply
Ironman95

I disagree with #10, the rest make sense. The reason to disagree with a high short interest, is that at some point all those short in the stock will have to buy it back, it can't last forever. This will actually put upward pressure on the stock. It would be better to look at the trend in shorting the stock. Is it increasing or decreasing?

January 02 2011 at 9:35 PM Report abuse rate up rate down Reply
Ange Purs

These "tips" are mostly common sense stock trading. There's a big difference between a trader and an investor. Investing is for the long term, and trading is not. Most amateurs ought to stay away from day trading, but multiple-day/week trading is a viable strategy that most can do. You cant trade in the dark without external info. Spending 5 mins a day on your trading activities and data gathering wont cut it. If you dont have the time to spend, then you arent going to be successful. The financial news cable stations (CNBC, Bloomberg,...) will provide you with crucial info and near term trends that will keep you on top of things. Diversity doesnt play in the trading game. What counts is to "know" about the stocks you are trading. If you follow the behaviors of a basket of particular stocks of your choosing, you will get to know their price motion behaviors across many different market conditions. That knowledge will give you the edge to make profits of significance.

January 02 2011 at 4:29 PM Report abuse rate up rate down Reply
jimmarginman

There is only one way to become a millionaire or these days a billionaire in the stock market and that one way is to "...be there at the creation." Or, one must get in at the beginning of a pump and dump scam. Insiders always make money in the stock market. Outsiders seldom make money. Someone advised against investing in gimmicks and stories. I disagree. Invest in the pre-IPO isue that is going to be promoted like the next cabbage patch doll. Read just one, any one, IPO prospectus and dsicern how much money the early pre-public investors made. Back in the day of the internet bubble isiders of even the failed IPOs made substantial returns on their money---not the 11% one made last year on the Dow or the 17% on NASDAQ or the 30% in gold---$100 for every $1 risked. Look for the newsletters that specialize in little known or unknown private corporations.

January 02 2011 at 10:19 AM Report abuse -3 rate up rate down Reply
jehadjimlatp

Libs you can't buy stock with food stamps and cheese logs.

January 02 2011 at 6:36 AM Report abuse -2 rate up rate down Reply
3 replies to jehadjimlatp's comment
ronsjigslures123

You want to see a world and the USA in a real Depression wait untile 2012 and gas prices hitting 5 bucks a gal. then you will see a real depression that will make the other big one years ago look like a joke. If you have a gas sucker of a car or big truck, a stop at the pumps will cost you 120 bucks for a fill, any head way that the USA gets THIS year to getting out of this mess will be for nothing if the price hits 5.00 a gal. Invest like it will in stuff that the high gas will affect most, people will stay home so invest in movie retals,and companys that send movies accross the to homes, online book companys, vacation spots that are close to big citys people will not travel far, and invest in casinos , people will gamble more close to home, and don,t foreget about silver it will hit 50 to 60 bucks, don,t hold on to it sell it when it hits a good profit for you, even if you hold on to it i don,t belive it will drop far, and hold at a good price for a very long time.

January 02 2011 at 4:22 AM Report abuse +3 rate up rate down Reply
1 reply to ronsjigslures123's comment
Ange Purs

Well, if you do truly believe in this sort of Armageddon, then buy USO. You'll then be insulated from this disaster.

January 02 2011 at 4:35 PM Report abuse rate up rate down Reply
ultraz2

Metal prices can reflect only one thing, the world is in a DEPRESSION after 37 continueous months of RECESSION.

January 02 2011 at 1:14 AM Report abuse +6 rate up rate down Reply
2 replies to ultraz2's comment
Ange Purs

Im sorry. I lost the handle on that argument. Could it be that metal prices are up because of increased demand world wide along with a little speculation thrown in?

January 02 2011 at 4:39 PM Report abuse +1 rate up rate down Reply
jwallstrom

Along with fear of future inflation.

January 02 2011 at 9:27 PM Report abuse rate up rate down Reply
ultraz2

The last time silver got this high, the big boys bailed out , and everyone else got burned as it CRASHED, BIG TIME LOSSES WERE RACKED UP, mostly by the small investors who didn't see the bubble before it was too late.The BIG BOYS BAILED OUT AND CAUSED THE BUBBLE TO BURST. It's going to happen again soon.

January 02 2011 at 12:38 AM Report abuse -1 rate up rate down Reply
2 replies to ultraz2's comment
Ange Purs

Hmmmmm. Was this the Hunt brothers attempt at cornering the silver market in 1980 when the price of silver peaked at over $50/oz? The price crashed soon after its peak bringing down the Hunt bros and silver speculators with them.
Who else got burned? I dont remember a silver crash since then. I suppose if you participate in obvious bubble formations, then you might expect the possibility of a catastrophic burn. No one I knew at the time would touch that bubble in any way, shape or form.

January 02 2011 at 4:49 PM Report abuse rate up rate down Reply
ronsjigslures123

In a 10 year span spot silver reads like this, 1/01/01 approx.4.25 per oz. .. 02/01/11 approx. 30.56 per oz. Those that bought during the hunt thing bought at around 1.50,1.75,2.00.2.50 per oz. how did they loose money if they held on to the stuff even if they cashed in in 1/01/01. If they held untile now they cashing in at 31.00 spot price. Silver has always gone up if only in small bumps over the years, worst that could happen is you would get your money back that you invested if you bought silver in raw,bars and coin form.

January 03 2011 at 12:54 AM Report abuse rate up rate down Reply