9 Golden Rules of Investing

JC Project Freedom 9 rules of investing

What are the 9 golden rules of investing every new investor should know?

Rule 1 – You are buying the business

If you have the money, will you buy the entire business? If you hesitate for a moment, then this business is not meant for you, do not even buy the shares. Buying a shares is to become the business owner which you need to believe that this business will thrive.

Let’s say your friend ask you to invest in his or her business, what are the questions you will ask? You will probably want to understand the nature of the business, is it something that you understand easily, who are the competitors and what are the competitive advantages? This is what we called fundamental analysis which is to study the company he wants to invest in such as financial statements, financial ratios, business moats, SWOT on industry and valuation. If you are to buy a business, you will hold the business for long term, not buy and flip next month. Then why will you buy the shares and sell the next day? We invest and not trade. We use technical analysis to give us a better entry and exit point only but that does not determine which company to buy or sell.

The key is how will this company look like in the long run? Is it growing or is it dying?

Rule 2 – Set aside budget for investment

You need to stay invested to weather the storms, short term corrections, and remain sane. This means you need to you are investing money which you do not need for a very long time.

It is to understand your financial capacities and understand how you are prepared to invest in the long term and remain serene. If you have savings to draw down during a market downturn, this will help you to stay invested. Be careful of leverage, if it is too large for its resources and can become a huge source of stress and bad decisions. In 2018, I sell 20 PUT USD 150 on AAPL stocks which is equivalent to an amount of USD 300k if I need to pick up the stocks to earn a premium of USD 9k. my other stocks are in a different stock brokerage account, I have the money to pick up the stocks but they are stuck elsewhere. The market turn against AAPL then, I suffered from 2 margin calls, forcing me to sell at the worst time. It is no fun to lose sleep over profit. Never ever go there, learn from my experience, and hope that you will never need to experience this yourself. I remember I will wake up at 3 am and check the price movement until the market close. That is just pure stupidity. In hindsight, I should have sold some Singapore shares and pick up the AAPL, USD 300k would have grown to USD 1.5m.

Rule 3 – Select strong companies

Companies that have strong margins, strong growth and low debt will guarantee the best performance. These companies will come with a premium in terms of share prices but there will be times when there is a window of mispricing and you can grab them at a discount. Better yet, you can identify companies that will display strong margins and growth in the future. Time is your friend as the companies will grow and compound, the byproduct will result in the share price rises.

As a long-term investor, be wary of the sirens of quick and easy money. It is imperative to avoid speculation, things that shine for a while will not turn into gold. You should only focus on the real gold that shines for a very long time.

Rule 4 – Invest in what you understand

Invest only in what you understand will avoid a lot of heartaches later. You should not invest in a business which sounds sexy but you do not understand what beast it will become in the long run.

If you work in a particular industry, you will have knowledge of industry and this will become your circle of competence. You can start from your circle of competence to invest and eventually expand it to incorporate different sectors.

I don’t invest in pharmaceutical industry because I do not understand it. Furthermore, I do not have the interest in it and will not force myself to learn it. There are other industries which I am interested in.

Rule 5 – Diversify your risk

With an equal weight over different companies in your portfolio will help you to remain calm during a volatile market. Every investor’s situation is unique due to his or her age, circumstances, needs and resources. A 20 years old can take a lot of risk and he can recover whereas a 40 years old may not have the runway to recover if he suffers from a permanent loss. The risk profile is different.

Diversification is important to spread the risk as an investment strategy. This can be across different types of assets such as gold, shares, bonds, commodities, and cryptocurrency to suit your preference. You should not hold more than 30 stocks as this will become diworsification as you will not have the resources to monitor so many companies. When the companies start to deteriorate in terms of fundamentals, you may not capture this and the share price will drop very fast.

Asset allocation is critical as it will have a major impact on whether you will achieve your financial goal. Without sufficient risk in your portfolio will not have achieved sufficient return, too much risk may destroy your portfolio.

Rule 6 – Volatility is your friend

The market is flushed with liquidity which means that the market will become more turbulent and you need to accept that volatility is your friend. Opportunities arise during the volatile market and it is driven by human behaviour. Risk and uncertainty are part of investing but it is proven that time in the market beats timing the market. When the market experiences volatility, some investors will jump out and back in when it is on an upswing, often buying at high and selling at low. This is counter-intuitive and does not generate the desired return for investment. Volatility is essential for an asset class to deliver value in the long run. Hence, embrace volatility and get used to it.

Rule 7 – Again forget about market timing

You should not entertain the idea of market timing, you should focus on allowing your money to compound over time which is a powerful multiplier to grow your wealth. By trying to get the best timing has proven to result in lower capital gain, it is impossible to perfect the lowest entry point and sell at the highest point.

Those who stayed on the sideline in fear of a market decline are often those who have never become rich. For example, we all know someone who sold everything in 2013, waiting for the market downturn but ironically miss the greatest bull run for the next 7 years and stay forever away from the market, living life in regret.

Rule 8 – Remember about costs and taxes

You need to avoid costs such as brokerage fees, custodial fees, dividend withholding taxes, management fees of hedge funds, and expense ratio. In short, you need to be wary of the cost, always aim to reduce your cost.

Rule 9 – Invest Regularly

You should save and invest regularly to reduce the risk of timing the market, this is the best way to beat inflation. By investing regularly with discipline is defined as dollar-cost averaging. Making regular investments with the same amount of money will allow you to buy more investment when the price is low and less when the price is high.

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