"The 2002 market crash changed my view of the world," remarks Fred Sykes pensively. "It forced me to abandon old myths that didn't work. It put me back on the right track. It made me choose between giving up altogether or acquiring the habits of a professional investor."
Today in 2009, I can see clearly which choice Fred made. He is going through the current financial crisis completely unscathed. While a storm is wiping out investors all over the world, Fred Sykes' annoyance from the market is comparable to a ripple in the water.
"If you had to condense all you've learned in ten rules, which ones would you choose?" I asked him, taking notebook and pencil out of my pocket. "Could other investors apply the lessons that were so hard for you to learn?"
These were Fred's responses:
- Develop long-term ambitions and work on their implementation by devoting daily a fixed amount of time to supervising your investments.
- The major difference between professional and amateur investors is that professionals are always willing to recognize their mistakes. If facts turn against your theories, drop the theories. Be ready to sell your shares when it becomes obvious that you have made a mistake.
- In stock market investments, like in real estate, the easiest profits are made by purchasing attractive assets at a low price.
- You don't need to spend hours on end doing research in order to achieve high investment returns. The cost of a few superb investment newsletters is negligible compared with the time you'll save.
- The cheapest way to avoid catastrophic losses in the stock market is to place stop-loss orders in every share in your portfolio. It's up to you to decide whether you are ready to take a loss of 10% or 20% before recognizing a mistake.
- Never invest more than 5% of your assets in one single share or venture. Even if you devote all the care in the world to select your investments, you will never be able to rule out all risks.
- There are dozens of stock markets in the world. If you live in the US or Europe, take a look at Brazil, China, Australia, or New Zealand. The costs of investing internationally are lower than you may think.
- Dividend-paying shares with a long history of increasing dividends every year are usually solid investments if you can buy them at a reasonable price.
- Never invest in something that you don't understand. Avoid obscure companies with unidentifiable sales and profits.
- Use the internet to the maximum. The amount of investment information available for free is mind-boggling. Nevertheless, remain sceptical, compare sources, and check everything several times.
The validity of the lessons we learn is often commensurate with the pain caused by our mistakes. Mismanaged assets, like mismanaged advertising, may lead to a financial loss, but if the loss teaches you a great lesson for the future, nothing has been wasted.
[Image by omniNate under Creative Commons Attribution License. See the license terms under http://creativecommons.org/licenses