Rules of Investing

Ten simple but timeless rules for the conservative long-term investor.

Running an investment business, as I do, is no easy task. Similarly, any investor who buys stocks on their own account knows just how tough it is to make profitable trades.

Over the course of my “education”, which involved reading copious amounts of books and articles on famous investors and investing styles, I’ve managed to narrow down a few rules that I believe have contributed greatly to the success of both those well-known players and in my own business.

I’ve also found a lot of the time that what is most simple and logic is most successful, but it’s also usually the most difficult to stick to. Any investor to changes his strategy frequently will end up with a lesser amount over the long-term than one who sticks to a sound, value based system.

In my business I found that the rules below are both universal and business-like. Ben Graham, the father of value investing, was the first to say, “Investing is most intelligent when it is most business-like”.

Some of the rules I follow are described below:

Rule 1

When we buy stock, we are buying businesses. Even though the business is publicly traded, it’s still a business nonetheless. We look at it as though we are buying the whole company, and not just a stock ticker. Therefore we pay much more attention to the value of the company as opposed to the stock price.

Rule 2

When we buy a business, the price we pay should have a direct relation to the cash the business is expected to generate. Businesses that historically did not or are unlikely to do so in the future are not of interest.

Rule 3

Understanding of a company’s business model is critical. If you can’t understand the model and identify competitive advantages easily, stay away from the company.

Rule 4

The price paid for the stock determines future returns. It is the single most important determinant of a successful investment. This may seem obvious but few investors realize how critical it really is.

Rule 5

To borrow a phrase, “Cheap crap is still crap”.

Rule 6

High returns come from buying high quality businesses at low to moderate prices. Penny stocks and low quality businesses are often cheap for a reason.

Rule 7

Similar to Rule 3, buy only what you understand. This is a more broad definition, for example: If you can’t understand how a structured product of option straddle works, don’t buy it!

Rule 8

Be greedy when others are fearful and fearful when others are greedy.

Rule 9

When calculating your total investment performance, always include all investments. It’s too easy to forget the losers and trumpet the winners. You learn more from the losers anyway.

Rule 10

Time is the friend of the long-term investor, and heals many, but not all, self-inflicted valuation wounds.

 

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