There is no set of rules that will guarantee you that you will make money in the market. There is also no ready-made recipe for investment success. In fact, even the originators of the rules described below sometimes also lost money! However, the point is to increase the probability of achieving large profits and reduce the chances of incurring large losses to a minimum.
The most important principles of investing
- Don’t look for a needle in a haystack. Buy a whole stack (John Bogle)
This is the guiding principle of passive investing. Hardly anyone is good at stock picking. But anyone can buy a low-cost ETF on a broad stock index. In this way, it will achieve a market rate of return cheaply and effortlessly, thus beating 95% of professional fund managers in the long run.
- The human nature of any person is the worst enemy of the average investor or speculator. Wishful thinking must be banished (Jesse Livermore)
Greed is not good, and fear is the worst advisor. Whether we want it or not, we are still governed by primal instincts. They worked perfectly in cave times, but they bring disastrous results on the financial markets.
- Be greedy when others are afraid. Be afraid when others are greedy. (Warren Buffett)
This is probably the most hackneyed saying of the “Oracle of Omaha”. Except that it is accurate. The most dangerous market is usually when investor sentiment is excellent. And the best bargains are pushed through doors and windows when fear and resignation reign supreme on the market.
- In investing, what is convenient is rarely profitable (Robert Arnott)
An investor, like any other person, usually prefers what he knows well and therefore considers safer. And so many people choose bonds over stocks, even though the latter perform better in the long run. It prefers domestic assets, even if they are often worse than foreign ones.
- The stock market is full of people who know everything about price and nothing about value (Philip Fischer)
Here we come back to Warren Buffett and the whole philosophy of fundamental analysis. Let’s just add that both price and value are constantly changing over time.
- Always keep cash in reserve for the opportunity (Philip Fischer)
A good investor is a prepared investor. So what if you have analyzed and predicted everything perfectly, if you are out of cash at the key moment? The investor is then left like the general who failed to pull up the reserves at the key moment of the battle.
- It doesn’t matter if you’re right or wrong. What matters is how much money you made when you were right and how much you lost when you were wrong (George Soros).
Investing is not about being right. You can predict everything well and still lose money (e.g. if you entered too early). You can also be wrong, but quickly change your mind and earn a lot. It is worth putting the ego in your pocket.
- In the market, capital flows from the active to the patient (Warren Buffett)
It is a neat compilation of several previous rules about “sitting” in the growing value and the right choice of investment. It is also worth adding that jumping from flower to flower involves paying commission. And this is probably why the financial industry encourages us so much to look for new investments.
- The market can be irrational longer than an investor can be solvent (J. M. Keynes)
And that is why investing on credit is so often discouraged. When a broker calls us with a demand to replenish the margin, our room for maneuver is drastically narrowed.
- Knowledge Investment Pays Highest Interest (Benjamin Franklin)
And probably according to this principle you decided to click on this article. I hope you haven’t regretted it.