THE SEVEN GOLDEN RULES OF SUCCESSFUL INVESTING

Being successful at anything requires following a set of rules. Good rules are the accumulation of decades of wisdom summed up into the few components that really matter. Successful football players, given as an example, win because they avoid penalties and because of the way they undergo a series of rigorous training. This is similar to academic learners. Successful students get A’s because of the way they study. The point is that investing in the stock market is no different except that when you succeed in investing, you make a lot of money.

 

RULE NUMBER 1 – THINK LONG TERM

Trying to time the stock market or risking it all to double your money in a year is at best speculating which is similar to the worst gambling. You may as well just take your money to Vegas and lose it there. However, those who are able to successfully navigate the stock market are not speculators or gamblers, but they are investors. Needless to say, they know they can beat the market because they think differently, they think smarter, and they think in a longer-term period.

 

RULE NUMBER 2 – GOOD COMPANIES MAKE GOOD INVESTMENTS

People need to understand and keep in their mind that investing is not like placing a bet on whether the Cowboys will cover the spread against the Packers in the big game. Investing is not trying to get the quarterly press release a microsecond before the other person. It is not even about trying to predict which stock that you think will go up the most. Fundamental Investing is all about buying a tangible piece of a business, or a share of that business. What’s more, your investment portfolio (the collection of all the different shares you own) is only as good as sum of the companies in that portfolio.

If you buy shares of high quality companies at reasonable prices, you will end up with a high quality portfolio with less risk. And good companies are the ones which have a unique advantage that others may not be able to imitate. They are simply the ones which generate high returns on capital, as they do not need to borrow a lot because their business is self-financing.

 

RULE NUMBER 3 – BUY WITH A MARGIN OF SAFETY

When it comes to investing, a margin of safety is formed when one buys an investment at less than its value while using conservative assumptions. The idea of a margin of safety is that you want to buy a business at a price that is low enough with consideration that your assessment could be completely wrong and therefore you would not lose that much.

RULE NUMBER 4 – DO YOUR OWN HOMEWORK AND KNOW WHAT YOU OWN

There is no substitute for your own work. You wish to buy a stock because CNBC recommends it, or because your uncle suggests it or perhaps the stock chart on your laptop screen looks good enough to convince you. Well, the truth is that all of these are a sure way to lose your money. Successful investors, in case if you are wondering, know exactly what they own. They buy stocks of companies with products they believe in. Not only that, but successful investors go the extra mile to analyze the financials of the companies’ stocks they own in order to make sure they are not missing anything. Remember, most of the extraordinary gains made in the stock market come after a stock is punished, or after it has already risen a lot but you are not going to have the conviction to stick with it unless you really know exactly the companies’ shares that you put your eyes on.

 

RULE NUMBER 5 – STAY CALM AND BE RATIONAL

The typical buyer’s decision is usually and heavily influenced by those around him, which is to buy when others are buying, and to sell when others are selling. Unfortunately, this is a recipe that is bound to backfire. The best investors are the ones who can fight this urge and remain calm through a storm on the sidelines of a market bubble.

RULE NUMBER 6 – DO NOT PUT ALL YOUR EGGS IN ONE BASKET, BUT YOU DO NOT NEED TO HAVE TOO MANY BASKETS EITHER

Diversification is one of the most critical business strategies for your portfolio so that if one stock blows up, it will not sink the entire ship. As much as you think that you will not make a mistake, you will do just fine. Even the masters do and that is why you are highly advised to not put all your eggs in one basket. When it comes to having diversification, research suggests that 90% of diversification benefits can be obtained in most markets with a portfolio of just over 20 stocks. In other words, the more you diversify beyond that, the less you know about each investment you make. After all, your first and second best ideas are always better than your 100^th best idea so while diversifying is crucial, make your best ideas count!

RULE NUMBER 7 – NEVER STOP LEARNING!

Perhaps the most important rule is to learn more and then keep learning. The fun thing about investing is that the markets are always different and companies are constantly changing. Hence, never stop learning about businesses, never stop learning from other great investors, and never stop learning from your own mistakes. Humility and an eagerness to learn are two traits found in all of the great investors. Even the world’s greatest investor "Warren Buffett" credits his partner Charlie Munger by teaching him that it is better to buy a great company at a fair price than a fair company at a great price.