11 Basic Principles Of Investing

This was a reply we made on Reddit for the question of a beginning investor, thought our regular readers might find the discussion useful too.

I know Nothing About Investing

“The basic principles:

-Diversify (8 or more non-correlated stocks).  Diversification only helps you avoid an individual stock risk, it does not help you avoid market risks (like last fall stocks & bonds all went down).  Having 8 Mutual funds each with 300 stocks that turn out to be closet S&P500 trackers is not being diversified.

-Any single bet you make, use less than 5-10% of your total.  “Day trade”, “swing trade”, and be active with 5-10% of your total.  Don”t play the market with all your savings.

-Pick your exit rule before you buy anything.  Buy Ford at $8 and plan to sell if it hits $6 or $10 or whatever makes you happy/comfortable.  But pick that point before you go in.  Otherwise you watch Cisco go from $75 in 2001 to $14 in 18 months “because it might come back up” and in 2009 it still peaks only around $25 or so.

-Study an industry and understand the stocks you buy – they are companies with products – do people buy the products? 

-Read footnotes in the back of the Annual Reports, skip the pictures in the front.

-Keep an eye on the trends.  General market trends, specific industry trends, or trends for a particular company.  Ski company will have different sales in the summer than the winter.  Companies profiting from Foreclosures are doing well now but maybe not in three years.

-Watch round-trip trading and management fees.

-Think.  Back test any theory you want to try out before doing it. Be cautious listening to any ”expert” on TV or Radio or mutual funds or financial planners. It”s your money so .. Think.

-Small investors often have advantages over the big trading houses.  Trading companies have massive computer systems with microsecond trading capability, but if they buy or sell a particular security they do so in such large quantities that they move the market.  So they are forced to buy and sell over weeks sometimes.

-Read up on ”Fundamental” and ”Technical” Analysis.  Understand both because professional traders are in either one of those two camps – and trade accordingly.

-Get a discount brokerage account and fund it with just a little cash – that if lost you won”t be terribly upset.  Then trade and learn.  You can paper trade for years but won”t learn fundamentals until you actually have “skin in the game”.

-Read Buffet, Lynch, Levitt, Fisher, Graham, and Magee.

Stop by my starting investor site http://www.greenhorninvestor.com

Good Luck !”


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