Investing your hard-earned money wisely is a crucial step toward building wealth and securing your financial future. However, it’s not something you should approach lightly. Successful investing requires knowledge, discipline, and a solid strategy. In this article, we’ll explore five fundamental investing rules that can help you make informed decisions and achieve your financial goals.
1) No Trading, Invest for the Long Term
One of the most common mistakes investors make is attempting to time the market through frequent trading. Many people have a perception of investing that resembles a scene from an old Wall Street movie, where frenzied stockbrokers in a bustling office shout buy and sell orders into their phones.
The truth is, most professional investors and especially traders struggle to consistently beat the market. Instead, consider adopting a long-term investment approach. The odds of the market performance being positive over the next month are roughly the same as a coin toss. On the contrary, when you extend the horizon to 15 years, the probability of stocks showing growth becomes overwhelmingly high, approaching a remarkable 99%. By holding your investments for several years or even decades, you can ride out market volatility and benefit from the power of compounding.
2) Don’t Use Leverage
Leverage can amplify both gains and losses, and it’s a tool that should be used with extreme caution, if at all. If you’re a seasoned and sophisticated investor, you may understand how to use leverage effectively. However, for the average investor, it’s usually best to avoid it entirely. Using leverage without a deep understanding of the risks involved can lead to financial disaster. As Uncle Warren Buffett says, “If you’re smart you won’t need leverage, if you’re dumb you have no business using it.”
3) Don’t Chase Trends
The investment world is full with latest trends and fads, from hot IPOs to the latest cryptocurrency and whatever an “NFT” is. While these opportunities can be tempting and your coworker may swear this is the next big thing, chasing trends often leads to disappointment. Remember, what’s trendy today might not be tomorrow, that’s why they’re trends. Before investing in something new, take the time to thoroughly understand the underlying asset or business. If an investment opportunity is too hard to understand, don’t do that thing. Invest in assets and industries you are knowledgeable about and have a competitive advantage in.
4) Stay Away from Businesses Just Because They Are Cheap
It’s true that the greatest investor the world has ever known, Warren Buffett, got his start buying really cheap businesses known as cigar butts, he also reads about 500 pages of annual reports per day. If you don’t plan on doing the same level of work, don’t expect to find the diamonds in the rough.
Investors are often drawn to stocks or businesses with low prices compared to their earnings or book value, assuming they are bargains. However, it’s essential to remember that stocks are priced for a reason. A stock may have a low valuation for a reason and lot of times, it’s because it’s a failing business, avoid these. Instead of seeking out cheap stocks because they’re cheap, focus on finding great businesses with strong fundamentals at a good price. Warren Buffett has since stopped buying the really cheap businesses that made him a millionaire and opted for the great businesses that made him a billionaire. His new motto is “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
5) Find a Mentor and Continuously Learn
Investing is a lifelong learning process. To become a successful investor, it’s great to learn from the experiences and insights of those who have already navigated the complexities of the financial markets. Seek out mentors or role models who have a proven track record of success in investing. It’s a special thing to learn from your mistakes but it’s even better to learn from somebody else’s.
If you can’t find mentors, read books. When you read a book it’s like having a one-sided conversation with an expert in their field, where they teach you everything they know, and you shut up and listen. Additionally, read blogs, watch youtube videos, and take courses. The more you learn, the better equipped you’ll be to make informed decisions and adapt to changing market conditions.
To sum it all up, following these five investing rules can significantly improve your chances of achieving financial success. By focusing on a long-term strategy, avoiding excessive risk through leverage and speculative investments, investing in high quality businesses at wonderful prices, and continuing to learn, you’ll be well on your way to building a robust and diversified investment portfolio. Remember, successful investing takes time and patience, so stay committed to your goals and adapt as needed. Your financial future will thank you for it.
