You follow traffic rules to drive safely and avoid accidents.
You follow tax rules to avoid being penalized by the government.
Rules are meant to follow, breaking them is not cool at all. You can be a good law-abiding citizen, but it doesn’t mean you have some basic rules for investing your money.
This blog post focuses on creating a system of investments rules. When you follow these basic rules of investing, you will reduce your chance of losing money and build wealth over time.
You will find these rules in 5 simple points below.
5 Basic rules of investing
Rule No 1- Act as an owner, not a participant:
When you are buying a stock, you are buying a piece of fractional ownership in the business.
Instead of seeing yourself as a stockholder, start to realize that you are an owner of the stock you invested in.
An owner focuses on the competitive edge, product likability, profitability, and market leadership of his business. Not the day-to-day movement in the share price of his business.
He knows as profitability continues to grow, the stock price will catch up to it over time.
Renewing your mindset as an owner helps you focus on the inherent quality of the business, not the share price movements.
Rule No 2 – Use Note pad:
“The toughest person to convince an idea on planet earth is yourself”
Most of the doubt arises from us If we can convince ourselves and develop a conviction in our investment idea. No stock tips, bull and sell signals, expert views will not deviate you from sticking to your core idea.
How to develop this? That’s where the Note pad rule comes into the picture.
Take a notepad and write in 100 words or draw a picture of why you chose this company to invest in. If you can’t breeze 100 words, forget that investment option.
This rule forces you to invest only in companies that you know, and avoid stocks that you are unsure about their business models.
Such practice will help you to develop a conviction on your investments and stick to them although market tides are against you.
My Note pad rule with ITC example
” ITC exist in the industry for 100 years”
It is a habitual stock because its main product is cigarettes. For many smoking cigarettes is a habit, but very few find success in breaking or changing their habit.
ITC needs less capital on investment to manufacture cigarettes, unlike capital gobbling industries like cement, construction, auto, etc.
It holds 78 % of cigarette market share in India. Since the average age of the Indian population is 28 years, more sales will be generated by youth consuming cigarettes.
Negatives are huge taxes by the government. Since tax revenue is needed ITC business won’t be shutdown by government.
This is my analogy why will I select ITC.
Rule No 3 – Never lose money
Rule No 1 ” Never lose money!”, Rule No 2 ” Never forget rule no 1″
This is an important investing rules of thumb for warren buffett.
You can make your money compound over time. To compound it, you must not lose your money! or face permanent capital loss.
How to imply this? By proper diversification, avoid getting into speculations, etc.
It’s easier to say than done. All investment has risk and reward!
Most of the time, we get hind sighted by the investment potential reward and forget the risk we are taking to achieve such a return.
It is better to consider the downside of an asset class before considering the returns. E.g. Cryptocurrency.
Rule No 4 – No Quick changes
If you are a shareholder in Eastman kodak company since 1975, your investment amount would be in the dirt now. Check it out
Here is why the approach of long term holding could not save your investment.
It is due to rapid changes in the digital camera industry. After the advent of smartphones with better camera features, the sale of digital cameras rapidly declines.
The same goes with the Automotive industry where EV vehicle manufacturers, Hybrid vehicle car manufacturers will put the Internal combustion engine manufacturer out of the race sooner or later unless ICE manufacturers change their business strategy.
Even if you want to invest in the auto industry, Auto lighting manufacturers, seat manufacturers, steering manufacturers, and plastic component manufacturers’ businesses won’t be affected due to changes in the auto industry.
Whether the Car is EV or a Hybrid, Lighting & seat are still needed in passenger cars.
No matter what technology advances happen, Things like people consuming Food, buying diapers, using razors, and personal hygiene products won’t go on the market.
That’s why companies like Procter& Gamble thrive for more than 180 years and brought billion-dollar revenue in sales.
Practicing this simple rules of investing analogy while adding companies to your portfolio is a great favor you can do for yourself.
If you find hard and confusing to invest in individual companies , then the best alternative way is Index investing.
Rule No 5 – Give time for your seeds
In any investment class, the heart of farmer is inevitable to reap great returns.
A farmer considers his seed quality before its sown in the soil. He cares for it, waters it and most importantly he gives time to reap the fruit of his labor.
Most of the investors made terrific money on their investments by simply sitting on their asses.
If you are a person who sells after a gain of 30% or 50% return. You need to change your strategy now and give time to the seeds you have sown.
Let’s take the S&P 500 index as it represents American business and see how well it had done in long term.
S&P 500 index has delivered nearly 2500 % of return during the 33 years of investment tenure.
We can also consider other emerging market indices like Nifty 50.
Even the Nifty 50 index delivered nearly 1850 % of return during the 25 years of investment tenure.
Holding stocks for the long term may not be as thrilling as constant buying and selling.
To succeed in investing – Learn to embrace boredom, if not better go to a casino!
If you follow any investments rules to pick stocks or any other asset class, please mention them in the comment section.
Thank You for reading. Happy Investing!
