Here's what you'll learn in 16 MIN
Rule #1: Think Long Term
Rule #2: Good Companies Make Good Investments
Rule #3: Buy With a Margin of Safety
Rule #4: Do Your Own Homework
Rule #5: Don't Follow the Herd
Rule #6: Don't Put All Your Eggs in One Basket
Rule #7: Never Stop Learning
Successful football players win because they avoid penalties and because of the way they train. Successful students get A's because of the way they study. Investing in the stock market is no different, except that when you succeed in investing you make money, a lot of money.
Rule #1: Think Long Term
Trying to time the stock market or taking big risks to "double your money in a year" is at best speculating, and at worst gambling.
Some one said that "what happens in Vegas, stays in Vegas" A fitting tribute for Stock Market Gamblers too.
Those who are able to successfully navigate the stock market are not speculators or gamblers, they are investors. Investors know they can beat the market because they think differently, they think smarter, and they think long-term.
Believe it or not, this long-term thinking advantage is known as "time horizon arbitrage", and it means that if investors learn to think long-term and can see beyond the daily and quarterly noise, they can gain a real upper hand.
As per Warren Buffet “Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”
Rule #2: Good Companies Make Good Investments
nvesting is not like placing a bet on whether the Cowboys will cover the spread against the Packers in the big game.
Investing is not trying to get the quarterly press
release a microsecond before the other person. It is not even about
trying to predict which stock that you think will go up the most.
The most consistent way to generate returns is through the principles of Fundamental Investing.
What is Fundamental Investing?
It is buying a tangible piece of a business, also called a share of that business and adding it to your portfolio.
Your investment portfolio (the collection of all the
different shares you own) is only as good as the sum of the companies in
that portfolio.
Its kind of like building a team. Not every player is going to have a good year, but together they can make it happen.
So how do you build an effective team?
Buy shares of high quality companies at reasonable
prices, and you'll end up with a high quality portfolio with less risk.
It's as simple as that.
Good companies are ones that have a unique advantage
that others can't copy. They generate high returns on capital and don't
need to borrow a lot because their business is self financing.
It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.
Rule #3: Buy With a Margin of Safety
In investing, a margin of safety is formed when one
buys an investment at less than its value, while using conservative
assumptions.
The idea of a margin of safety is that you want to
buy a business at a price that is low enough that your assessment could
be completely wrong and you wouldn't lose much.
Its almost like rigging a coin flip so that it goes "Heads I win; tails, I don’t lose much"
Rule #4: Do Your Own Homework
There is no substitute for your own work.
Buying a stock because Your Boss recommended it, or because your uncle recommended it, or the stock chart looks good is a sure way to lose money.
Successful investors know what they own. They buy stocks of companies with products they believe in and they go the extra mile to analyze the financials of the company to make sure they're not missing anything.
Remember, most of the extraordinary gains made in the stock market come after a stock is punished or after it has already risen a lot, but you're not going to have the conviction to stick with it unless you really know the company.
Its not enough to just buy stocks because they were recommended to you, "You have to know what you own, and why you own it."
Rule #5: Don't Follow the Herd
The typical buyer's decision is usually heavily
influenced by those around him. Thus, he ends up buying when others are
buying, and selling when others are selling.
But that's just not the way its done. In fact, following others is a recipe that is bound to backfire.
Investors thought Stocks would never lose value in 2010 - 2011, and went crazy. Don't be that guy!
As much as we'd like to think that individual investors are rational
human beings, the truth is, the market can sometimes be a fanatical mess
of everyone trying to get in on the next big thing.
Then when the bubble bursts everyone loses their shirts because they didn't take the time to do the research themselves.
he best investors are ones that can fight this urge remain calm through a storm, and remain on the sidelines through a bubble.
”Be fearful when others are greedy, and be greedy when others are fearful!”
Rule #6: Don't Put All Your Eggs in One Basket
Diversification is one of the most critical
strategies for your portfolio so that if one stock blows up, it won't
sink the entire ship.
As much as we think we won't make a mistake, we will.
Even the masters do and that is why we can't put all our eggs in one
basket. There's power in diversification.
However, research suggests that 90% of
diversification benefits can be obtained in most markets with a
portfolio of just over 20 stocks. The more you diversify beyond that,
the less you know about each investment (Rule #4: Do Your Own Homework).
Your first and second best ideas are always better
than your 100th best idea, so while diversifying is crucial, make your
best ideas count!
"Try to avoid buying a little of this or that when we are only
lukewarm about the business or its price. When we are convinced as to
attractiveness, we believe in buying worthwhile amounts”.
In other words, go big or go home!
Rule #7: Never Stop Learning
Perhaps the most important rule is learn, learn more, and then keep learning.
What makes investing fun is that the markets are always different and companies are constantly changing.
Never stop learning about businesses, never stop
learning from other great investors, and never stop learning from your
own mistakes.
Humility and an eagerness to learn are two traits found in all of the great investors.
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