When I started investing, I invested based upon my gut feeling – if I felt that an investment would be profitable, I would invest in it. I looked at a few things, such as the P/E ratio, the asset’s price action over the past year, etc. After investing like this for one year, it finally dawned upon me that I had no clue what I was doing. Hence, I morphed into a systematic investor, one with a fixed set of rules so that I would pass every potential investment through my set of rules to see if it fit my criteria.
Over time, I developed 2 sets of rules: one set on the proper mindset that a successful investor must have, and one set on how to actually invest (the investment criteria I use). In this post, I’ll outline the proper mindset set of rules.
Rules are important – they prevent us from going astray from the planned course. Here are my top 10 investment rules (revised, because I usually incorporate new rules and delete old ones once every few months).
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- Follow through with your plan! I don’t care what it is – the biggest reason why investors and traders lose money isn’t because they have a flawed strategy; it’s because they couldn’t go through with their strategy. This means that if you’re a long term investor, you have to stay calm and ride the momentary ups and downs! (I can’t tell you how many “long term” investors I see who sell at the bottom of the panic – an action that goes against their strategy). If you’re a trend follower, do not switch to contrarian investing techniques. Macro investors who mix their own strategy up with that of a technical analysts’ are bound to lose money (which is why I lost a whooping 26% in 2009). Every strategy has its positives and negatives – switching between multiple strategies will only create large losses.
- Avoid the “financial advisors”. Those guys charge fat fees, and quite honestly, their own advice is useless most of the time. Meanwhile, you’ll be able to save yourself a lot of money by sticking with your own strategy and avoiding excess fees (broker fees, etc). [See Finding a Dependable Financial Advisor]
- Avoid getting stuck in yesterday’s mentality. The biggest problem with a lot of chart-followers and technical investors is their basic assumption, that history will repeat itself in exactly the same way. This is why a lot of investors lost money in 2010; they thought that stocks in 2010 would repeat what happened in 2008 and 2009.
- Make risk your friend. You can’t escape risk, but you can use it to your advantage. I’ve spent a lot of time looking for risk-free investments, and all to no avail. Risk is regarded as a dirty thing that should be avoided at all times. Now, I believe that since one cannot avoid risk, you might as well use to to your advantage. By this, I mean that when risk is incorrectly priced (e.g. a small risk, but the market is offering a big profit for taking the risk), grasp the opportunity. [See How to Minimize Investment Risk]
- Forget the next “sure-thing.” “There’s no point in looking for the golden pin in a haystack made of gold” – Warren Buffett. Too many people spend time looking for the next Google or Lululemon that they forget something – it’s much easier to buy the whole market when it’s going up and profit than it is to find the next “sure-thing.”
- Don’t set your expectations too high (I’ve made this mistake in the past). I used to expect a minimum 30% return of myself every year. What would happen is that I would only have 20% by December, and because I had the burden of achieving that goal, I would frantically look for a potentially investment opportunity. In the end, I chose not a A level investment but a B or C+ investment, which led to me losing a decent chunk of the money I already made. Patience.
- The market is like an elastic band – whenever it’s pulled too far in one direction, it will snap back in the other direction. Beware when the market has been pulled to a limit – do not test that limit, like many investors do in a bubble.
- Time is on your side. A lot of people get into the markets expecting to make a quick buck. Not going to happen! It takes time to make money, time to let the profits compound into a sizeable stake. Once again, be patient.
What’s key about these “mindset” rules is that no matter who you are, no matter what your investment strategy is, these apply to you. On the other hand, my set of “how to invest” rules don’t apply to every, because they’re tailor made to fit my personality and strenghts.
Tony, a blogger from A Young Investor, shares his thoughts and opinions on the financial markets.