Learning from The Masters: 10 Tips for Successful Investing
There’s plenty of advice out there when it comes to investing. Some of it is excellent, some is terrible, so who should we listen to?
Who better than the masters, the people who live and breathe the financial markets and have made hundreds of millions of dollars over the years. I’m talking about John Templeton, John Neff, and of course, Warren Buffett. Let’s see what they can teach us.
#1 Set realistic goals
When it comes to goals, the first thing to understand is why you’re investing in the first place. What’s your endgame? If you’re looking for a get-rich-quick scheme (zany or otherwise), you won’t find it here.
Investing is all about steady growth, considered decisions, and playing the long game. As Warren Buffett said, “The stock market is designed to transfer money from the active to the patient,” – this should be the basis for your targets.
Set reasonable goals. Don’t put pressure on yourself to make as much money as possible. Doing so could lead to unnecessary risk and only work against you in the long term.
#2 Always do your homework
John Templeton once said, “If we become increasingly humble about how little we know, we may be more eager to search.” This makes a lot of sense when it comes to investing. Never make assumptions about the stock or product you’re interested in, but instead, carefully review whether it’ll help meet your goals.
A few things to consider are the company’s financials, the industry it’s in, and what’s going on in the world right now that might affect either of them. For example, this year, Goldman Sachs correctly predicted that the price of oil was going to crash due to the COVID-19 pandemic, and made over a billion dollars by selling their oil stock
This doesn’t just extend to winners and losers, though. There are also ethical questions when it comes to investments. Index Trackers, by their very nature, contain stocks in many different companies and industries, and you might not want to either prop up or profit from businesses that you find unethical.
#3 Learn to diversify
Diversification is an interesting bone of contention in the financial world. From a young age, we’re told not to put all our eggs in one basket, and while this is a sound idea, taking this too far in the opposite direction is not desirable either.
John Neff weighed in on the subject with, “Obsession with broad diversification is the sure road to mediocrity.” And a lot of investment gurus have said similar. They’re biased, however having made their fortunes identifying winners and losers.
However, there is truth to what Neff says. Think about a game of roulette. If you put a chip on every number, you’re guaranteed to pick a winner, but will lose overall.
The trick is to diversify when you first start investing. Use the experience of your wins and losses to help you learn, and as you grow in confidence and knowledge, you can tighten up your portfolio and fill it with winners more often than not.
#4 Focus on the long-term
As I wrote above, investing is not about getting crazy rich immediately, but rather steadily accumulating wealth over time. People like Jordan Belfort rarely win. Legendary trader Jesse Livermore once said, “As long as the stock is acting right, and the market is right, do not be in a hurry to take profits.”
You want steady, gradual growth and shrewd investments that pay consistent returns over a period of years (five to ten, usually). Many investors prefer to leave their money in good investments because you can never get too much of a good thing – and with benefits like compounding interest and dividends, there’s plenty of opportunity for long term growth.
#5 Find your tolerance for risk
Your appetite for risk is a personal thing. You might like the excitement of throwing the dice, or you might only feel comfortable when you’re playing it safe. Whichever applies to you, one golden rule remains: never gamble what you can’t afford to lose.
Warren Buffet once said, “Risk comes from not knowing what you’re doing.” It’s very important to understand the relationship between risk and reward, as well as the risk involved in the investment you’re eyeing up. I’ve said it before and it bears repeating: do your homework.
Generally speaking, the higher the risk, the greater the reward, so you want to find out where you feel comfortable on that spectrum.
#6 Don’t wait – start investing even with a small amount of money
You certainly don’t need to be rich to start investing but you do need to start somewhere. Even if you invest relatively small sums into various things you’re interested in, you’ll get a feel for how they work and you won’t be risking what you can’t afford to lose. There’s only one way to get the experience you’ll need to be an investment pro, so what’re you waiting for?
#7 Learn to Reinvest
“If you want to become really wealthy, you must have your money work for you,” said John Templeton, and of course he’s absolutely right.
One of the ways you can do this is by reinvesting your profits rather than spending them. What this does is help you create a self-perpetuating cycle of growth, based on the wonders of things like compounding interest.
#8 Minimize investment fees and expenses
Fees and expenses eat into your profit, so reduce them as much as you can. There’s no such thing as a free lunch and investing platforms will take their slice. However, find out how much that’s going to cost you and whether it’ll sour the deal – if the fees are too high, the overall reward might not be worth the risk.
#9 Don’t panic if the economy stalls
Let’s kick this one off with John Neff on the volatility of investing, “The market has good days and bad days, good years and bad years. You can’t predict them, and they can reverse course with stunning speed. But you can learn to cope with them and improve your odds.”
Experience and planning play a big part in your success as an investor. Many of the tips here reinforce the point that investing is a long term strategy, and downward turns are expected along the way. The worst thing to do is to pull out of an investment at its lowest point, only to find that it was only a blip.
#10 Start as young as possible
As we’ve touched on many times throughout this blog post, time is a formidable ally for investors, and the more you have, the better. Not only will your investments have more time to mature, but you’re also in the position to accrue experience faster and get into good investing habits.
Even if you don’t consider yourself young anymore, it’s never too soon to pick up the basics and get involved. Furthermore, if your kids are getting to the age where they need to learn the importance of saving, you can learn alongside and teach them.
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