2. Invest in what you understand
It is important that you know what you’re investing in. Top investors don’t invest in something if they don’t understand it. They stay within their circles of competence. For those who know little about investing, there are other alternatives such as broad-based mutual funds or low-cost index funds.
3. Remember the greed/fear factor
At times, assets become vastly overpriced. This is because investors’ greed pushes prices above their intrinsic values. But, after market crashes, assets sell below their intrinsic values because fear has overtaken investors. Usually when everyone is greedy, it is time to sell or reduce positions; when everyone is fearful, it is time to buy, especially when you can buy quality at a discount.
One way to avoid being trapped into the greed/fear factor is by not following the crowd blindly. Because someone just made 100% over the past few months doesn’t mean you can do it. The price has already risen.
4. Keep investing costs low
Even saving 1% a year can add to your returns once they’re compounded over longer periods of time. No wonder investors are choosing index funds and ETFS as these are low-cost alternatives to mutual funds.
Another way to save is to shop for financial advisors should you need one. Of course, it is important to get professional advisor, but shopping for one can reduce costs and, effectively, increase your returns.
If you like to invest in stocks on your own, look for online brokerage houses that offer quality services and low fees. Nowadays, there are even brokers who don’t charge commissions. Moreover, if you place trades, make sure not to overtrade.
5. Investing is a business, not a gamble
Treat investing as your own business. Investing entails risk but it is not a gamble. If you like to gamble, go to a casino.
Even speculators aren’t gamblers. They place high reward-to-risk bets. For example, they’re willing to lose $1 for every $3 they can realistically expect to gain. Successful speculators enter investments if there’s a high chance of success, return is high, and downside is limited. This requires patience, knowledge, and experience.
If you have an extra $200 and want to “throw it in the market just to see what happens,” you’re a gambler. Instead of gambling, invest this money in your own business- the business of investing.
6. Pay attention to insiders
The management of the company can make a huge difference. Before investing, learn as much as possible about them and their past performance. Also, publicly listed companies need to disclose insider transactions. Often, it’s a good sign if insiders are buying. One way to find insider transactions is via Yahoo Finance (in “Holders” section after you enter a ticker).
7. Beware of analysts and financial advisors
Don’t blindly follow professional advice. Often you’ll see price targets in investment research reports. These are very rough estimates, which often prove unreliable. Also, analyst ratings can be skewed. Not every analyst will want to alienate corporate executives with “sell” ratings, especially if his or her company offers financial services to the company covered under research. Still, research reports can be useful, just don’t solely rely on them.
You should also beware of financial advisors. Don’t entrust all your money to a single source. Question professionals and their assumptions. You’ll see that professionals will often come up with different estimates and opinions about the same investment.
8. Master your emotions and admit when you’re wrong
Many investors will not sell a losing investment, while taking quick profits on a winning investment too quickly. If you buy a stock of a company, it is not your baby. Don’t hold on to it without good reason.
If you’ve learned about investing, and have done decent research, and are diversified, then there’s no reason to panic if something goes down. If you’ll need money in few months for a major expenditure, then don’t put that money in high risk investments.
You should not gamble, but if investment starts going down, and you still believe in it, and are investing for the long-term, then hold on. If you’re into short-term speculation, and can’t wait for it to recover, then set a stop loss at a level at which you’re comfortable.
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1. Protect your capital
The first rule is to, above all, protect your capital. If you have no capital, you can’t invest and won’t build wealth. One of the ways to protect capital is to diversify. Not only among stocks, but asset classes. Also, by investing internationally, you’ll be able to put some assets in a country/region other than your own. That’s geographic diversification. This will also add exposure to other currencies. Down the line, if your native currency declines, then prices of exports will rise. This can be partially offset with exposures to other currencies.
Diversification is good, but too much of it will lead to average returns. Great investors, at times, concentrated their bets. This, however, requires knowledge of what you’re doing. If you don’t have that knowledge, better protect your capital by diversifying it well.
Protecting your capital is also important because you will need to earn higher percentage returns to recover what you’ve lost on a percentage basis. For example if you lose 10%, you’ll need to earn 11.1% to go back to the original amount as your base of capital will be smaller after the loss. If you lose 30%, you’ll need to earn over 40% to recover. With a large loss of capital, such as 80%, you’ll need to earn 400% to recover.
Investing rules can serve as guidelines if you're not sure about an investment
These investing rules were derived from studies of the best investors in the world, both present and historical. The list includes Warren Buffet, Peter Lynch, Carl Icahn, George Soros, John Bogle, John Templeton, and Benjamin Graham.