Follow the 10 basic rules of investing and you’ll be well on your way to a strong and secure investment portfolio.
Sometimes investing in stocks feels like shopping for wine. There are people out there who know what to look for, how to spot a bargain, and which wine goes well with any kind of meal you can imagine. Then there are those of us who look at the pretty label and figure that even if the wine isn’t very good, at least it will look cool on the shelf. And like stocks, wines can range in price from very affordable to holy-moly-who-the-heck-would-pay-that-much?!
There are hundreds, and maybe thousands, of varietals of wine grapes, so even figuring out what wine you like can feel daunting. To make things easier, and to help you look past the labels, wine and food publications and websites offer “rules” for selecting wine. Investing is quite similar. Between ETFs, Mutual Funds, Stocks, Bonds, Options, and Futures, there are thousands of choices for investors to sort through. But like wine, there are also 10 basic rules of investing that can help you make smart choices that may or may not “look cool” in your portfolio, but will give you something tasty for any occasion.
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The 10 basic rules of investing that can make you rich – or at least financially comfortable
In addition to sorting through the myriad choices we have in the stock market, investing can be scary. Recession, bear market, market correction, and market crash are not words you want to hear in relation to your money – all of which you’re hearing now, unfortunately. On the flip side, however, the market could surge or recover, it might hit record highs, or you could buy into the early stages of a new bull market. How, exactly, do you get the good stuff without putting your money at risk?
Some of the leading investing legends like Warren Buffett, Benjamin Graham, and Sir John Templeton have several common traits:
- They have methodologies that make sense
- They are disciplined in their investment processes
- They work hard and stay focused
- They are patient
- They successfully handle their psychological biases
Don’t be fooled, though. Even though these rules are simple, they can be hard to stick with. Some of them seem too basic while others don’t make sense on the surface, but they work. If you want to argue with Warren Buffett about investing, well, we wish you luck. If you’d like to emulate his success, start here:
- Follow Warren Buffett’s two rules. Buffett once said there were only two rules to follow with your investments: Rule #1: Don’t lose money. Rule #2: Don’t forget rule #1. Seems fair. We might add one more: make money. In truth, the rest of these rules just help you follow these three rules.
- Go against conventional wisdom. Attempt to be fearful when others are greedy and to be greedy only when others are fearful. Going against the crowd can be an effective way to make money.
- Look in the “wrong” place. Sir John Templeton once quipped, “People are always asking me where the outlook is good, but that’s the wrong question. The right question is: Where is the outlook most miserable? The obvious application of this concept in practice is to avoid following the crowd.”
- Look for the overlooked opportunities. To quote Joel Greenblatt, “Companies that are too small for professionals to buy and that are not large enough to generate sufficient commission revenue to justify analyst coverage are more likely to be ignored or misunderstood. As a result, they are more likely to present opportunities to find bargain-priced stocks.”
- Buy companies at bargain prices. Look for solid return on equity, high operating margins and low debt. In addition, look for companies that generate lots of cash and have a consistent operating history during the past 10 years.
- Stick with what you know. Stay within your circle of confidence. If you don’t understand what a company does or how it makes money, avoid it.
- Hold your stocks. Many investors forget that the way you make money in the stock market is by holding stocks, not buying or selling them. Sounds obvious, doesn’t it? That’s just the how the stock market works. The value of your portfolio rises when a stock you own rises. So you have to be holding on to a stock if you’re going to take advantage of its appreciation.
- Invest in companies that are currently paying dividends. Investing in undervalued companies requires waiting for other investors to discover the bargains you have already found. Sometimes your wait period will be long and tedious, but if the company pays a decent dividend, you can sit back and collect dividends while you wait patiently for your stock to go from undervalued to overvalued.
- Be patient. Wait for the right time to buy. Patient investors are the best prepared when opportunities emerge. A tidal wave of such opportunities should arrive once the fallout from this coronavirus crash subsides.
- Recognize that perfection in investing is impossible. Not all your investments will be winners. Losses are a normal part of the business. Your goal is to ensure that your profits outweigh your losses, and the best way to do that is to have an investing discipline.
There is never a guarantee in the stock market, but there are ways to limit your risk while setting yourself up for huge rewards. Hopefully, keeping the 10 basic rules of investing in mind will help you make smart choices, weather storms like the current one, and maybe even turn you into the next famous investor.
What investing rules do you follow as you build and curate your portfolio? Share your ideas in the comments below.
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