My top 11 rules for investing
1. Be a perfectionist when looking at shares
There are plenty of fish in the ocean and there is no share that is a once in a lifetime opportunity. With thousands of stocks to choose from, missing out on a lucrative trade is no big issue as there will undoubtedly be plenty more.
2. Avoid conformation bias
Sometimes we see a share and before delving into proper research our mind has been made up on what we think about it. This is not a good idea and it may turn out that this initial presumption is incorrect. The problem is that even after extensive research we ignore ideas that go against the initial view and rather only focus on ideas that support the initial view. A good idea to avoid this is to write out bullish and bearish points and compare them. In extreme cases one may need to actively try and prove that the view you do not believe in is correct.
3. Do not blindly trust the experts.
There is nothing wrong about taking a tip from someone else especially if they have considerable experience and success. But, ultimately some quality checks of your own are required as everyone who has tried investing has made mistakes. Also, they may not be as experienced as they seem.
4. Favour consistent performance.
When looking for tips look at those who have consistently outperformed, not those who have had 1 year of a blow out performance. It is less likely that it is a fluke is they have consistently done well
5. Watch the actions of the executives
Nobody knows the company better than the directors do so there actions should be monitored carefully. Watch wether they have been buying or selling shares. Be careful if a director has left a company and check the reason why. It could be a warning for tougher times ahead.
6. When buying the dip, buy in small CASH amounts.
Nobody can tell when exactly the markets have bottomed so buy in small amounts to reduce the potential for losses. Also buy in fixed cash amounts (instead of share amounts) as this helps you buy in at a cheaper price.
7. Use enterprise valuation instead of market cap when valuing a market cap.
Some companies appear cheap, but this may be deceptive and are often called value traps. What’s actually owned by the shareholders is could actually be less than it seems.
8. Cut your losses and run your winners.
It can be tempting to bank profits quickly and never sell a share at a loss. This is not a good idea as although you may have a higher percentage of profitable trades it is undoubtedly better to make a large profit on share even if it happens slightly less often.
9. Take advantage of operational leverage.
Many companies have a relatively fixed cost base so every increase in revenue will be directly equal to the same increase in profit. Earnings can increase very quickly un that situation. A good example of these are social media companies or mining companies.
10. Watch the general market.
In a bear market even quality and undervalued shares will probably fall. So if you suspect a recession it could be better to wait.
11. Diversify your portfolio.
This decreases risk considerably.
There are plenty of fish in the ocean and there is no share that is a once in a lifetime opportunity. With thousands of stocks to choose from, missing out on a lucrative trade is no big issue as there will undoubtedly be plenty more.
2. Avoid conformation bias
Sometimes we see a share and before delving into proper research our mind has been made up on what we think about it. This is not a good idea and it may turn out that this initial presumption is incorrect. The problem is that even after extensive research we ignore ideas that go against the initial view and rather only focus on ideas that support the initial view. A good idea to avoid this is to write out bullish and bearish points and compare them. In extreme cases one may need to actively try and prove that the view you do not believe in is correct.
3. Do not blindly trust the experts.
There is nothing wrong about taking a tip from someone else especially if they have considerable experience and success. But, ultimately some quality checks of your own are required as everyone who has tried investing has made mistakes. Also, they may not be as experienced as they seem.
4. Favour consistent performance.
When looking for tips look at those who have consistently outperformed, not those who have had 1 year of a blow out performance. It is less likely that it is a fluke is they have consistently done well
5. Watch the actions of the executives
Nobody knows the company better than the directors do so there actions should be monitored carefully. Watch wether they have been buying or selling shares. Be careful if a director has left a company and check the reason why. It could be a warning for tougher times ahead.
6. When buying the dip, buy in small CASH amounts.
Nobody can tell when exactly the markets have bottomed so buy in small amounts to reduce the potential for losses. Also buy in fixed cash amounts (instead of share amounts) as this helps you buy in at a cheaper price.
7. Use enterprise valuation instead of market cap when valuing a market cap.
Some companies appear cheap, but this may be deceptive and are often called value traps. What’s actually owned by the shareholders is could actually be less than it seems.
8. Cut your losses and run your winners.
It can be tempting to bank profits quickly and never sell a share at a loss. This is not a good idea as although you may have a higher percentage of profitable trades it is undoubtedly better to make a large profit on share even if it happens slightly less often.
9. Take advantage of operational leverage.
Many companies have a relatively fixed cost base so every increase in revenue will be directly equal to the same increase in profit. Earnings can increase very quickly un that situation. A good example of these are social media companies or mining companies.
10. Watch the general market.
In a bear market even quality and undervalued shares will probably fall. So if you suspect a recession it could be better to wait.
11. Diversify your portfolio.
This decreases risk considerably.
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