Investing is as much of an art as it is a science. There is a ton of data and analytics that go into every investment decision, and companies spend billions developing software to analyze the stock market. However, many people have also made great investments on the “social and art” aspects of investing: management style, leadership, and more. Here are some important investing principles that you should consider when making your next investment decision.
Fundamental Investing Principles
Fundamental investing is focusing on investments because of the financial performance, economic performance, or other metric based indicators. Many of the best investors in the world have based their performance on the fundamentals of a company.
Common fundamentals that investors look at are cash flow, earnings, debt ratios, and more. The thought is that companies with strong fundamentals will be strong stock performers. The basis for this is that good cash flows, low debt, and strong earnings, will also reflect in the stock price of a company.
Other fundamental investing principles revolve around the economy as a whole. For example, investors will look at economic trends, such as manufacturing, trade, consumer spending, and more to base trading decisions. The thought is that macro-economic trends play a big role in how companies and entire stock market sectors will perform over time. For example, low consumer spending usually bodes bad news for retail companies since individuals are spending less. Or low manufacturing numbers can mean bad results for manufacturing companies.
Technical Investing Principles
Another important investing principle is technical investing. This is looking at the stock market technically – based on price movements and other price metrics (like beta). Many short term traders use technical investing principles to make their trades. They rely on short and medium term price movements to make trading decisions, and they usually take these positions for just a short period of time.
Technical traders rely on a variety of charting patterns to make their trade decisions. For example, they will use trend lines based on the price of the stock over the last 30, 90, or even 200 days. While every trader has different signals they trade on, the basic principle in technical trading is price.
Non-Metric Investing Principles
Finally, there are a lot of non-metric based principles that investors make investing decisions on. One of the most popular non-metric based principles is leadership or management. When you think about this metric, think about visionary leaders like Steve Jobs, who defined how the company would make products and perform. Investors also look for very rigid financial leaders that focus on the bottom line of the company.
Other non-metric based principles just involve common sense. A very popular investing technique is to go into the store and watch what people are buying. If people are buying a lot of something, chances are the company will be doing will. This idea of trend spotting consumers is another example of a non-metric based investing principle.
The bottom line goal is there are a lot of different principles when it comes to investing money, and you will need to decide what is right for you.