Despite all the fun stock prices seem to be having these days, there is no doubt we are passing through one of most uncertain times ever to invest.
I do think the uncertainty is going to rise even further so I wanted to put this note together.
Please don’t follow any of my advice you read below. This is what I do and follow myself, and it works for me.
1. Expect, Don’t Fear Corrections
A stock market correction is always around the corner. But no one can predict when it will strike and how much it will hurt. So don’t sit on the sidelines expecting a correction. But always be prepared for one at all times.
2. Buy Bad Stocks, Not Bad Businesses
You cannot pick a bad business and expect to make money on it, even if you buy it cheap. Yes it may happen, but hope is not an investing strategy. Always own good businesses.
How do you spot a good business that’s also a bad stock?
- It is run by people who have been honest and well-behaved in the past – check out their experience in capital allocation and corporate governance.
- It has a strong brand that consumers associate with (‘social proof’ is a powerful influencing factor).
- It sells a product/service that more people will consume in the future.
- It will be around for 20 years (at least).
- Its stock has fallen in price, looks cheap compared to its long term value, and not many are looking to buy it thinking it’s a loser (and thus a ‘bad stock’).
3. No Stock Rises Forever
Every stock has a limited quantum of returns in its lifetime. Thus, if a stock has already earned great returns in the past, the probability of it growing your money in the future reduces. Note the word ‘probability’ here. Don’t bet your money just because a stock’s price is rising. Bet on its underlying business.
4. Diversify to Control Risk
It’s good to be brave and concentrate your investments in 3-5 stocks if you have the stomach to weather the losses in 2 of them. But diversification has always been a safe and profitable strategy. Diversify to control the risk of permanent capital loss in a few stocks.
As a thumb rule…
- Of all money you need after five years, have 75% of it in stocks/equity funds. 75:25 is a good ratio to have between stocks and bonds (excludes cash).
- Don’t have more than 10% of your money in one stock.
5. Don’t Bet on Diversification
Warren Buffett once said, “Diversification is protection against ignorance, it makes little sense for those who know what they’re doing.”
You’re not Warren Buffett! Then diversify but remember that owning too many stocks ensures mediocre results, not protection. Also, diversification won’t protect you from your reckless investment decisions.
6. Don’t Trade
If you are frustrated often reading this on Safal Niveshak, this site is not for you. 🙂 Trade in stocks with your savings only if you are also willing to take all of your money, make paper-planes out of it, go on a hill and fly all of them in the air. It will be a thrilling experience but you will not see your money come back to you. That’s day-trading for you.
7. Don’t Buy the Stock Price
Don’t buy just because the stock has multiplied in the past and everyone says it will multiply in the future. Buy only because your reasoning says that the business has been good in the past, will be good in the future, and is available at a bargain price.
8. Don’t Buy All At Once
Turning all your cash to gold at once can be wonderful, but turning all your cash to stocks at once can be dangerous. Stagger your stock buying over a period of time, even if prices are rushing towards their new highs.
9. Don’t Be a Fool
When the going is good, there are many who are waiting to rip you apart through their readymade stock tips and other useless financial advice. When you encounter such well-dressed and charming people who lure you with their smart investment strategies, remember this – a fool and his money are always invited everywhere, and a fool and his money are easily parted. You don’t be that fool!
10. Do Your Own Homework
Do your own homework before buying any stock. Do your own homework before buying any stock. Do your own homework before buying any stock. Repeat!
Read about the business, know why it is a good long term opportunity, and assess the probability of losing your capital permanently in it.
11. Have Faith in Cash
When stocks return 8% in one day, and cash returns 8% in one year, holding the latter looks like a sin. But indulge in it. If you don’t like the market or have anything compelling to buy, it’s never wrong to go with cash.
Remember what Munger says – “It takes character to sit there with all that cash and do nothing. I didn’t get to where I am by going after mediocre opportunities.”
12. Check Jealousy Out
Seeing and hearing about others all around you growing their money 100%+ in less than six months makes you envious. Charlie Munger says envy is the only sin that has no upside. Believe him and don’t let envy drive you into making reckless decisions of buying your own “can-double-in-six-months” stocks.
13. Hope is Not An Investing Strategy
There are many good investing strategies: buying cheap stocks, buying high quality businesses, turnarounds, top down, bottom up, to name only a few. Hope is not among them.
Make well-studied investments, and then be patient with them. Be willing to accept reality, especially when it’s harsh, and then be willing to reconsider your decisions with changing times. But check hope out of the door.
14. Respect Luck
I find a lot of people these days who proudly show me their brilliant returns earned over the last 6-12 months. Most of all of these people attribute these returns to their skill in picking the right stocks at the right time.
If you are one of them, I suggest give luck its due respect. Luck is a very difficult thing for us to deal with psychologically, because our brain can easily come up with a cause for everything. But investing is largely about luck. Respect it or it will disrespect you.
15. Avoid Money Stress
If you follow these rules, you won’t get rich investing your money but you can do very well. And if you combine that with investing in yourself, you will get wealthy.
But always remember one thing – your financial wealth is a side effect of real inner wealth. This is the most powerful investment you can do with your time and your life.
You can always make money back when you’ve lost it. But one single split moment of stress and anxiety you will NEVER make back again.
So avoid stressing about your stock market investments, for there’re many things brighter and more beautiful in life than a rising stock price.
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