Sunday, 8 July 2012

From fairy tales to workable methods

Most ideas about investment are fairy tales, although pervasive ones. Who could blame you for believing what is daily propagated by alleged experts? Do you spend lots of time selecting stocks that you intend to keep for the long term? Are you aware of the fact that market corrections take place from time to time?

After losing 20% of their liquid assets in the last stock market crash, many investors threw away their previous theories. Pain pushed them to change. They have become determined to reshape their practices and take control of their lives. 

They have promised themselves that, whatever happens in the future, they will not be paralysed again; they will not be playing sitting duck any more. If investors had to condense all they have learned in a few rules, chances are that they would choose the following ten:

1. Develop long-term ambitions and work on their implementation by devoting daily a fixed amount of time to supervising your investments.

2. 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.

3. In the stock market, and also in real estate investments, the easiest profits are made by purchasing attractive assets at a low price.

4. 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.

5. 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.

6. 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 eliminate all the risks.

7. 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 think.

8. 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.

9. Never invest in something that you don't understand. Avoid obscure companies with unidentifiable sales and profits.

10. Use the internet to the maximum. The amount of investment information available for free is mind-boggling. Nevertheless, remain sceptical about what you read, compare sources, and check everything several times.

Investment mistakes are no different from others. Marketing failures allow businessmen to improve their next product. Human resources blunders help companies hire better candidates in the future. 

The validity of the lessons we learn is 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 crucial lesson for the future, nothing has been wasted.


[Image by baxterclaus under Creative Commons Attribution License. See the license terms under]