Know the edge of your competency

You’ve often said that one of the keys to your success has simply been to avoid making the garden-variety mistakes that you see other people make.

Warren (Buffett) and I have skills that could easily be taught to other people. One skill is knowing the edge of your own competency. It’s not a competency if you don’t know the edge of it. And Warren and I are better at tuning out the standard stupidities. We’ve left a lot of more talented and diligent people in the dust, just by working hard at eliminating standard error.

- Charles Munger

For a small time investor like us what is the learning from Munger's answer. Looking back at the stupidities committed earlier gives us enough knowledge on that. I have listed some of them.

1. Invest in yourself to think like an investor. Reading books written by value investors help you understand how the market behaves at various points in time. Similarly reading books on individual sectors help you understand the positives and negatives of the sector which will help you to exploit it to your own advantage.

2. Invest in a company which you can understand. If you have already invested in any company which you find it difficult to comprehend, move away from it irrespective of whether it made a profit or loss. Once you have a better understanding about the company you can invest in it again.

3. Invest in a leader and not in a third rung or fourth rung company. Leader doesn't mean the said company has the highest market capitalization in the sector. Small companies growing into large company or finding another Infosys or Microsoft from the haystack is not your business. These are marketing gimmicks by fund management companies to increase their AUM. Investing in a large cap will serve most of the investors purpose.

4. Be like a python which lies motionless while hunting for its prey. To be an investor, you need not be a hyper active trader with regular buy and sell activity with up-to-minute stop loss calculations. Once you have done the homework be patient and wait for the right opportunity to invest in company. Mr.Market when feels pessimistic comes up with incredible offers. Those are the times you need to pounce on your preys. All other time, wait for the dividends to be credited to your account and give a thorough look at each of your investments.

5. Don't judge your investments based on how it quotes currently. If your calculations are correct, any dips in prices are opportunities to increase your holdings.

6. Never let your ego go to your head and brag about it to others. Overconfidence is the first step to the downfall. Be a eager learner, all the time.

7. And the most important of all, don't forget your mistakes. The mistakes commited by you today are the learning for the days ahead.