Five Successful Stock Investing Guides

Physician's Money Digest, February29 2004, Volume 11, Issue 4

If you're a successful physician-investor,you may think youalready know all you need to conquerthe stock market. But if yoursuccess has been lacking, or you're justgetting started in investing, you need allthe good advice you can get. If you findyourself grasping at straws, a solid setof rules may help. The following arefive rules that every physician-investorshould consider using:

1. Do your homework. Don't buy astock unless you understand the businessinside and out. Investigating acompany before buying shares will helpyou avoid big mistakes. Discretion isusually the better part of valor. Missingout on the first couple of upside pointswon't make a big difference in the overallperformance of your portfolio andthe cooling-off period allows you toavoid poor investments.

2. Find economic moats. An economicmoat keeps competitors from attackinga firm's profits. If you can identifyhow a company keeps competitors atbay and consistently generates above-averageprofits, you've identified thesource of its economic moat.

3. Have a margin of safety. Don'tbuy a stock without some measure ofprotection. Sticking to a strict valuationdiscipline will help you improve yourinvestment performance. Your marginof safety should be larger for shakierfirms with uncertain futures and smallerfor solid firms with reasonably predictableearnings. Not making money isa lot less painful than losing money.

Think about it:

4. Hold for the long haul. The costsof frequent trading can be a huge dragon performance over time. Treat yourstock buys like major purchases andhold on to them for the long term. You wouldn't buy andsell your car, refrigerator, or DVD player50 times a year, would you?

5. Know when to sell. Understandingwhen to sell your stock is crucial tosuccessful investing. Several good reasonsare when the company's fundamentalshave deteriorated, the stock has risentoo far above its intrinsic value, you havetoo much money in one stock, or if thereis simply something better you can dowith your money. However, if the stockhas dropped—or skyrocketed—it doesn'tmean that you should immediately sell.

Pat Dorsey is the director of stockanalysis for Morningstar, Inc. Hecurrently manages the firm's teamof 35 equity analysts and wasinstrumental in developing the newMorningstar Rating for stocks aswell as Morningstar's stock coverage. Dorseyappears weekly on the Bulls and Bears financialshow on FOX News. For more information, contactMorningstar (312-696-6000; www.morningstar.com). This article was reproduced with permissionfrom The Five Rules for Successful Stock Investing:Morningstar's Guide to Building Wealth andWinning in the Market (John Wiley & Sons; 2003),by Pat Dorsey.