What if you could make money while sleeping?
What if your money doubled while your working life halved?
What if making money could be an adventure?
Investing makes all that possible. It is the one scheme that can help you achieve both growing wealth and passive income in your pajamas.
But there’s got to be a catch, right?
Yes, there is! It’s pretty darn overwhelming and daunting if you don’t get the right guidance.
Let us look at some timeless investing tips by some of the most successful investors in the world.
1. Know your why
Seems pretty basic, right? Most people start investing with the strategy of ‘making money.
And that is the point, of course!
But, why do you want to make money? Why are you investing?
Is it to save for retirement? To buy a house? Or to fund your new start-up? Perhaps to travel the world?
Define your ultimate investment goals. Understand your overall financial situation and how wise investments fit within it. Before you invest, examine your debt obligations, tax situation, ability to fund retirement accounts, and insurance coverage.
If you invest without a clear purpose, you’re more likely to make the wrong choices. For instance, if the market crashes, you may panic and sell immediately to avoid losing money.
But if you’re clear about being in the game for the long term, you’ll wait for the market to pick up and get the best selling price with a good profit margin.
Any investment you choose should fit into your plan. If it doesn’t move you closer to your goal, or you can’t manage the risks associated with it, walk away.
Additionally, investing without a goal also makes it hard to stay motivated. When your investments are tied to a long-term goal, it’s easier to stay the course.
2. Invest in what you know
“Never invest in a business you cannot understand.”
– Warren Buffett
Can I foresee the success/loss of this business?
This is the second most holy question you need to ask yourself before you start investing.
Buffett says that all investors should stick to what they know. He calls it their “circle of competence.”
You must learn how to value businesses and identify the ones within your circle of competence and the ones that are outside. If you don’t fully understand what a company does, how it makes money or the market it’s in- DITCH IT!
Don’t be wooed by every popular stock.
Does this mean you must be an “expert” on every damn company?
No! You just need to possess the ability to understand current trends and predict what will follow.
There are two things you can do to ensure that.
– Pick an industry you have had a career in. You will probably have a reasonably strong grasp on how these particular markets work and who the best companies are in the space.
– Illustrate the business with a crayon. If you can’t get a reasonable understanding of how a company makes money and the main drivers that impact its industry within 10 minutes, move on.
3. Don’t own too many funds
“The great paradox of this remarkable age is the more complex the world around us has become, the more simplicity we must seek in order to realize our financial goals,”
– John C. Bogle
Diversification is good, but too much of it can be harmful.
An over-diversified portfolio with a large number of funds quickly becomes difficult to monitor. As a result, one may continue to hold underperforming schemes.
This could compromise returns in the long term by taking away your ability to invest a substantial amount in other good schemes. It may also lead to profits from high-performing schemes getting compromised by losses from low-performing ones.
Bogle offered eight rules for fund selection to those investors pursuing actively-managed funds.
One of them was to NOT own too many funds. He truly believed that it was generally unnecessary to go much beyond four or five equity funds.
He recommended a simple five-fund portfolio, allocated as follows: 50% large-cap, 10% mid cap, 20% small-cap, 10% specialty, and 10% international.
4. Do your own homework
“Behind every stock is a company. Find out what it is doing.”
– Peter Lynch
How many times have you taken a tip from a trusted friend about the next hot stock and lost money?
Or fallen prey to the hysteria created by the news and bogus articles? Those headlines are made to trigger one’s emotions to do something radical.
So are brokers reliable? Most are just treating it as a day job to pay the bills.
Now go figure who can be trusted the most with YOUR money. You, of course!
One reason the investing world appears so daunting is due to the overwhelming noise. It is often difficult to detangle good information from bad.
Most of the financial industry is incentivized to get investors to do something. Many investment houses and brokerage firms profit when investors buy or sell shares.
The solution? Learn the lingo and form an opinion of your own. Do your own research based on facts from the company’s financial statements.
5. Don’t interchange price with value
“The stock market is filled with individuals who know the price of everything but the value of nothing.”
– Phil Fisher
Price is what you pay; value is what you get.
Price is arbitrary; value is fundamental.
Still don’t get it? Consider this.
Suppose the price of a stock is 100 Rupees. This price is determined by a list of factors.
Many of these are driven by human emotions such as fear and greed, market tendencies, politics, etc.
Events not even remotely related to stocks can cause a significant shift. A flick of change in any one of these factors affects the price of a stock. Sometimes it’s completely arbitrary without any rhyme or rhythm.
Stock prices swing the investors’ emotions but rarely affect the value of a company. In other words, sometimes they have zero correlation with the future cash flow of a company.
If a company doesn’t have quality, don’t buy it just because the price is low.
Find a company that you believe in, and has solid fundamentals.
Look at its financial statements, listen to conference calls, and vet management. Then wait until the price falls below its value.
If you do this, you can buy companies on sale, sell them for their true value and make a lot of money in the process.
In the short run, however, values don’t matter.
6. Think long term
“If you aren’t thinking about owning a stock for ten years, don’t even think about owning it for ten minutes.”
– Warren Buffett
Once you’ve purchased a high-quality business at a reasonable price, how long should it be held?
Firstly, it’s hard to find excellent businesses that continue to have a bright long-term future.
Furthermore, fundamentals can take years to impact a stock’s price. Quality businesses earn high returns and increase in value over time. As Warren Buffett said, time is the friend of a wonderful business.
Secondly, stocks are volatile. That makes stocks riskier investments.
If you want to get a higher return, you have to take on more investment risk. The longer you hold the investments, the less risky they are.
On the same note, don’t sell at the first sign of profits; let winning trades run. However, if your stock loses its value and the losses start piling up, get out. Never throw good money after bad.
Finally, trading activity is the enemy of investment returns. Constantly buying and selling stocks eats away at returns in the form of taxes and trading commissions.
So, the longer you stick, the better.
7. Control your costs
There are very few things you can control in the investing world. Fortunately, one of them is the investment cost.
Where possible, minimize fees.
The more you pay in commissions and management fees on your investments, the greater the drag on your returns.
Investing in low-cost index funds such as mutual funds or ETFs is the best way to keep costs low.
8. Don’t let emotions drive your judgment
“Buy not on optimism, but on arithmetic.”
– Benjamin Graham
Fear and greed are perhaps the greatest enemies of successful investing.
In a bull market, the lure of quick wealth is difficult to resist. Investors speculate and buy shares of unknown companies without really understanding the risks involved.
In a bear market, on the other hand, they panic and sell their shares at rock-bottom prices.
Are sounds familiar, doesn’t it?
Knowing when to get out of a trade is far more difficult than knowing when to get in.
Before you act on any emotional impulse, take a look at the numbers. Your heart can deceive you, but the numbers won’t.
9. Buy and hold, don’t buy and forget
“It’s not supposed to be easy. Anyone who finds it easy is stupid.“
– Charlie Munger
Your portfolio’s long-term success requires you to periodically review it.
You have invested in different classes of assets over a period of time to spread your risks. Owing to market conditions, however, some of your investments will do well at times, while others will not.
Maybe economic conditions have changed the prospects for a particular investment or an entire asset class. Or some life circumstances have forced you to change your investment goals over time. Your asset allocation will need to reflect those changes.
For example, as you get closer to retirement, you might decide to increase your allocation to investments that can provide a steady stream of income.
Your various investments will also likely appreciate at different rates. This will alter your asset allocation without any action on your part.
If you initially decided on an 80 percent to 20 percent mix of stock investments to bond investments, you might find that after several years the total value of your portfolio has become divided 88 percent to 12 percent. Conversely, if stocks haven’t done well, you might have a 70-30 ratio of stocks to bonds in this hypothetical example.
If you don’t monitor your holdings periodically, you won’t know whether a change is needed. You won’t know if you’re losing opportunities to make money.
If you can’t review your portfolio due to time constraints or lack of knowledge, then you should take the help of a good financial planner or someone who is capable of doing that.
10. Be patient
“The stock market is a device for transferring money from the impatient to the patient.”
– Warren Buffet
Have you ever noticed the common thread between all the successful investment strategies?
However, not everyone can master this virtue.
Investment in its true essence is for long-term gains. Warren Buffet’s case is a truthful testimony of this.
In 1973, he purchased shares of The Washington Post Company for the US $10.6 million. A year later, the stock prices plunged nearly 20% and it took three years for the stock to grow past its initial purchase price. However, after that, its prices kept increasing and so did the value of Buffet’s holdings in the company.
Today, this investment is considered one of his most profitable ones.
Had Buffet redeemed his investment when the stock prices started falling, he would have not only suffered losses on the purchase price but also lost out on the future growth of the stocks.
What’s the lesson?
You need to remember that you’re an investor, not a seller.
The patience required for investing is a vital part of financial discipline. It shows how well you can check your emotional state, greed, and manage money to achieve your goals.
There’s no denying that investing is a tricky game. Sometimes it’s a pure gamble.
Risks will always be there. Which bet doesn’t? So there’s no way you can get rid of them completely. In fact, the higher the risk, the higher the return.
However, to win, you need a strategy. Then you need discipline and commitment to stick to it.
Having some sage rules to guide your decision-making process will increase your odds of succeeding.
You get better at investing with experience. Not all knowledge can be acquired through reading.
Once you get a hang of it, you won’t get rattled by small fluctuations.
If you ever feel lost, just go back to why you started investing in the first place.
With the right plan and by following the correct steps, an investment is undoubtedly the easiest and quickest way to make money.