The first four rules of investing

So some of you out there might think that the stock market is the key to your growing fortune.  And while you’re mostly right, especially if you have a 401k or use index funds to grow your wealth, you’re also kind of wrong.  Not by much, mind you, just a tiny bit.  The reason here is that more fortunes are lost on Wall Street than won.  This isn’t exclusive to just stocks but extends to private placements, forex trading, futures trading, the commodities market, and even bonds.  The reason here is that many people, quite simply, don’t understand the way the market works.  So here are four rules for investing in individual companies, just to start, to help keep you safe, grow your wealth and keep your mind at ease.

1.  Neither give advice on what stocks to buy nor take advice blindly from people, whether they are brokers, investment bankers or simple some blogger writing about stuff.  Let’s face it, if you don’t know a company inside and out, know their growth record, profitability, when their debt is coming due, etc, you probably don’t know the company well enough to invest in them.  Some people, mainly technical traders who work off trends in the market, might argue that you don’t need to know anything about a company to profit off this.  While this may be true for traders who make millions of dollars a year, it is rarely true for the individual investor putting a couple hundred dollars into the market.

2.  Take your profits when you do and don’t worry about missed profits.  Sometimes you buy a company, sell it for a profit and then watch it keep going up.  Yeah, that sucks.  But you still made money.  Don’t get greedy!  When you invest, it’s the little things that matter.  Making a sure profit is better than taking a loss.

a.  There is of course a minor side note to this rule.  If you’re investing in the market, don’t day trade and make 30 or 40 trades a day! Be selective, find a good investment and hold onto it for the long term. You’ll lower your tax costs on the transaction by turning it into a long term capital gain and you’ll weather ups and downs more easily.

3.  Profits will come and go from day to day.  Some days you’ll be up 3 or 4% while others you may be down 10%.  Don’t let the bastards get you down.  You need to be patient, trust yourself and the decisions you made.  You may have to adjust your stocks over time to account for material adverse changes in some investments but overall, be patient.  It’ll take you much further than panic and fear will.

I think this guy has it down pretty good

I think this guy has it down pretty good

4.  You can’t survive the market without capital, patience, and an understanding of risk.  It doesn’t matter what you’re trying to invest in, eventually you’re going to run into rumors and ghosts.  You’ll hear people telling you to bet big on this one opportunity, that you can make a fortune shorting this penny stock while going long on porkbellies and trying to corner the orange concentrate market.  You’ll need to be patient in your actions, never push your risk beyond what is safe and don’t jump into any market if you don’t have the capital to survive it.

There are two running themes through all four of these rules.  They all have to do with patience and the psychological strength one may possess.  Ultimately, these are going to be two of the most important aspects of any part of your life.  If you’re investing, you need to be patient but also able to walk away from a loss without letting it break your stride.  You need to be patient while paying your debts in life and never be afraid that your plan won’t work.

You may recognize this philosophy a little bit from Mr. Money Mustache and from Stephen Covey’s book The 7 Habits of Highly Effective People.  It has a lot to do with how we run our lives and how we handle investing.  The basis here is that there are only so many things that we can control in our lives but we concern ourselves with many things we have no influence over.  Investing falls firmly into this.  We can’t control where the market goes, which company will be profitable and which company will fail.  Concerns like this are not things we can control.  What we can control is when we buy and sell stocks.  We can control how much profit or loss we will incur.  This is the psychological strength we need in our day to day lives.  It allows us to be patient and strong during market ups and downs and allows us to recognize what we can and cannot control in our day.  

So stop worrying about the market, the debt limit, etc.  You can’t control those things.  If this whole debt limit showdown gets to you, then vote for someone else next time or run for office yourself, because that’s the limit of your control here.  If you’re going to start investing beyond index funds, follow the rules above.  You can’t control how the market will function but you can control your actions on the market.

2 thoughts on “The first four rules of investing

  1. I agree that you need to have patience. Successful investing occurs over the long-term, not the short-term. The more you focus on the short-term, the less successful you will be when it comes to investing.

    • Patience and the ability to stick with a plan. Think about Warren Buffett. Never lets his fear or other people’s opinions sway him. Builds a strategy, grows with it and never wavers.

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