Five Principles for Successful Stock Market Investment

1. Do your homework by investigating the details of the company whose stock you're buying, its financial condition. Know what you're buying, review past financial statements, evaluate competitors within the industry, make your own decisions, and judge calmly to avoid investment behaviors that lead to bad outcomes during the process of comprehensive investing.

2. Look for companies with strong competitive advantages. Competitive advantages can protect a company's interests from harm. The best long-term investments are those whose competitive advantages maintain above-average profit margins for many years. The key to a competitive advantage is being able to answer some deceptively simple questions, such as: How can the competitive advantage be sustained long-term?

3. Have a margin of safety. The investment process is about discovering good companies and assessing their value. The difference between a stock's market price and its estimated value is the stock's margin of safety. When determining a reasonable purchase price for a stock, it's important to include a margin of safety, which can mitigate your investment losses. Valuation is the most important part of the investment process.

4. Hold for the long term. Frequent trading, over time, means the taxes and commissions paid will compound. Buying a stock is a significant purchase and should be treated as an important investment act. Investing should be a long-term endeavor.

5. Know when to sell. Knowing when to sell a stock is more important than knowing when to buy. Continuously monitor the company whose stock you hold; your focus should be on the company more than the stock itself, such as news about the company and information about its industry. What affects a stock's price is the company's future, and that is what you should base your decision to sell on. The following five questions will put you in a good investment mindset: When the reason you bought the stock no longer exists, the stock is no longer worth holding; When various signs indicate it's time to reassess the company's future prospects, and its performance has substantially deteriorated compared to its past consistency, it's time to sell; When the stock price reaches an unusually high level, far exceeding its intrinsic value, even the best companies should be sold; When you constantly seek higher-return opportunities to allocate your funds, moving capital from an investment with average expected returns to one with significantly high expected returns is also a reason to sell; Don't let greed affect the management of your investment portfolio. When a stock occupies too large a proportion of your portfolio, you should reduce its allocation.