7 Golden Rules Of Profitable Investing Now

Fund managers want to keep you in the dark on these important rules of investing in the stock market, so you may believe they can invest better than you.

In my other article, we show that small investors like you have advantages over big fund managers, advantages that you have that even Warren Buffett envies.

Now we shall level the playing field, and uncover the Rules of Profitable Investing that successful investors like Peter Lynch use.

Warning! The following rules of investing may come as a surprise!

Let’s Dive In!

Read Also: 7 Deadly Sins of Beginner Investors

What Are The 7 Golden Rules Of Investing In Stocks

Every road to success has certain rules to follow, same goes for investing. Amount dozens of rules for investing, there are a few that stand out the most and should be followed by every investor who wants to profit from the stock market.

Here are the 7 Golden Rules of Investing that all successful investors follow:

  1. Don’t follow the crowd
  2. Invest don’t gamble
  3. Know the value, know the price
  4. Diversify
  5. Don’t listen to expert’s forecast
  6. Invest in what you know
  7. Beware of fear and greed

Read Also: Warning Signs of Stock Market Crash

1. Don’t Follow The Crowd

“Be fearful when others are greedy, be greedy when others are fearful.”

Investing Advice from Warren Buffett.

These are the words that Warren Buffett said when asked for advice on investing. In other words, “don’t follow the crowd”.

Although this sounds easy, it is actually easier said than done. Simply because following the crowd is basically our natural instinct.

7 Golden Rules of Investing - Don't follow the crowd
7 Golden Rules of Investing – Don’t follow the crowd

In the wild, animals tend to stick in a herd because of safety in numbers, when the predators are here, their chances of survival will be much higher.

But in investing, sticking to the herd has the opposite effect. Instead of safety in numbers, if you follow the herd for investing, you will most likely lose your investment or at most be mediocre.

The Reason is Simple:

If you follow the average, you will be part of the average.

But in most cases, because of the human nature of selling when fearful and buying when greedy, most beginner investors do worst than average.

They tend to buy when the stock price is sky-high and sell when the stock price is very low.

If investing is to buy low sell high, following the crowd will lead you to do the opposite.

By following the crowd, these investors follow the crowd and made the wrong decision at the worst possible time.

Let’s check this short video by National Geographic on an experiment on herd mentality.

Herd Mentality

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2. Invest Don’t Gamble

Some people say that investing is basically a form of gambling. This may be true to a certain extent but I don’t totally agree. In a short term, you will get a 50% probability that the price going up and a 50% probability that the price going down. But in a long term, the price of the stock always reflects the value of the company.

7 Golden Rules of Investing - Invest don't gamble
7 Golden Rules of Investing – Invest don’t gamble

Short-Term ‘Investors’

Many ‘day traders’ who invest for the short term call themselves investors, which I don’t really agree with.

Day traders trade on the fluctuation of the market in the short term. They trade on the price of the stock that is driven by human greed and fear. The price they trade will give them a 50% probability of stock prices going up and down.

The value of the company itself is not taken into consideration, but instead, the unpredictability of human behavior is used in each trade instead.

Although they do use technical analysis to help them in each trade, I don’t really agree that they are called investors.

Long Term Investors

On the other hand, successful investors such as Warren Buffett invest for the long term. They don’t invest in the unpredictability of human behavior but in the value of the company itself.

Warren Buffett have been famously quoted ‘Our favorite holding period is forever.’

What? Forever?

Yes, that is how he made his billions. Simply because when you have found a great company, you want the company to help you grow your investment.

In a short term, the price will most often not reflect the value of the company. But over the long term, the price of the stock will reflect the intrinsic value of the company.

Investing is about buying a good value stock for a low price and selling it when the price is high.

Read Also: Rich Mindset vs Poor Mindset

3. Know the Value, Know The Price

We love to do the shopping and it is always exciting if we are able to get a great deal. Thus, the same concept goes for buying stocks. Whatever stock we are thinking of purchasing, we will always want to know that we are not overpaying it, but buying it when it is ‘on sale.

Great stocks go on sale once in a while, especially during a market crash. But how do we even know if the stock is currently on sale?

7 Golden Rules of Investing - Know the value, know the price
7 Golden Rules of Investing – Know the value, know the price

“Price is what we pay, and value is what we get.”

Warren Buffett

Every company (represented by its stock) has its own intrinsic value.

(Intrinsic value is the value of the company if you are buying the whole company.)

Price is what most people ‘think’ the company cost right now which is controlled by fear and greed.

Most of the time, the price of the company and the value of the company are similar, but once in every few years, the value of the company and the price differs.

  • The price of the stock is more than the value of the company, it is called overvalued.
  • The price of the stock is less than the value of the company, it is called undervalued.

Stocks become overvalued and undervalued on 2 different occasions:

  1. Stocks become overvalued when the market is too optimistic, generally during a bull run.
  2. Stocks become undervalued when the market is pessimistic, generally during a bear market or market crash.  

For investors who want to make a profit from investing, buy the stocks when the stock is undervalued and sell them when it becomes too overvalued. Thus, knowing the value of the stock is just as important as knowing the price of the stock.

Read Also: What are the risk and benefits of investing in Real Estate Index Trust (REITs)?

4. Diversify

Diversification is especially important for investors who do not have time to manage their portfolios or those who only have a piece of basic knowledge of investing.

This rule is important to most investors. Even though diversification won’t get you a stellar return on your investment, you won’t do very badly either.

Diversification is a great protection against ignorance. So, unless you are Warren Buffett, or Charlie Munger, who is amazing at finding great stocks by studying the balance sheet and income statement. The best advice is for you to diversify your portfolio.

There is an old saying of “Don’t put all your eggs in one basket”.

Holding a portfolio of just one or two stocks can be pretty dangerous when things go south. Diversification is to hold a portfolio of investments with a low correlation to each other.

7 Golden Rules of Investing - Diversify
7 Golden Rules of Investing – Diversify

Wrong Way of Diversification

Some people ‘diversify’ by buying 30 stocks from the same sector or industry which are highly related to each other. In other words, when one of the stocks falls, all the other stocks will fall as well. Because all are from the same sector or industry.

Not only do you have to manage 30 different stocks, which a lot of mistakes can happen, but this is also the wrong way of diversification.

Right Way of Diversification

The right way of diversification is to buy stocks that do not correlate to each other. And the best way of buying such stocks is by buying the respective Exchange Traded Funds (ETFs).

ETFs are a low-fee basket of stocks from that sector or industry where it is professionally managed to reflect the sector’s or industry’s general performance.

An example of a diversified portfolio is as follows:

  • W% Gold ETFs
  • X% Bonds ETFs
  • Y% REITs ETFs
  • Z% Blue Chip Stocks ETFs

Gold and bonds are usually inversely correlated to stocks and REITs.

This way, your investment portfolio will generally have less fluctuation and you will have a good night’s sleep each night.

There is a Golden Ratio on how much % should you place your money on each investment tool.

In our future articles, we shall discuss the All Weather Portfolio which is first introduced by hedge fund manager Ray Dalio and popularized in Tony Robbins’s book MONEY Master the Game: 7 Simple Steps to Financial Freedom.

Read Also: How to prepare for a market crash by age?

5. Don’t Listen to Expert Forecasts

Most experts will hate me for this, but don’t listen to the expert’s forecast, or at least listen with a pinch of salt.

Don’t get me wrong, I am not saying all experts are bad, they definitely know their stuff about investing, they are experts.

It is just that when the expert tells you what is hot right now and what to buy or what to sell. It is already too late in the game.

When they make recommendations on certain stocks, the stock might already be overvalued by the time you learn of the news. Other investors might already be taking out their profit. New investors who just learned of the news may now be buying the same stocks at an all-time high which is not something you should do.

On the other hand, when the experts ask you to sell a certain stock because of some ‘secret’ news source they are not telling you. The stock may already be all-time low and is now a bargain. Somehow, the value investors are buying at the same price that the new investors are panic selling because some experts say you should sell.

Be extra mindful of expert’s forecast on a certain stocks and do your own research before you make the next buy or sell decision.

7 Golden Rules of Investing - Don't listen to expert's forecast

Read Also: How to find good dividend stocks like Warren Buffett?

6. Invest What You Know

Everyone has a different background and a different understanding of different industries. Stick to investing in what you understand and stay away from those which you don’t.

Warren Buffett calls it,

“Invest in your circle of competence.”

You don’t get successful in investing by knowing a bit of every industry, you profit from investing by being knowledgeable about a few selected industries which interest you.

Warren Buffett buys Coca-Cola in 1988, not long after the famous Black Monday. With a low price and great value, Warren Buffett purchased 23.35 million shares of Coke. Since 1988, Coke stocks have climbed 1,750% and made Warren a very wealthy man. With a current owner of over 400 million shares of Coke, Warren is getting half a Billion dividend yearly.

How did Warren Buffett make a such fantastic investment?

Simply because he and many other successful investors, invest in their circle of competence, or in other words, invest in what they know.

You can too make such a great investment, but first, you have to find the few industries which you know best.

Here are the steps for finding you own circle of competence:

  1. Draw 2 circles slightly overlapping each other and each gives a title
    • My Passion
    • Where I Earn/ Spend My Money
  2. Fill each circle, if that item falls into both categories write it in the portion where the circle overlaps.
  3. Now see what are the items that are found at the overlapped circle
  4. Select 3 items and research stocks that are related to these 3 items.
  5. These stocks that are related to these 3 items will be your first circle of competence

Getting your circle of competence is just your first step, then next step is to be very knowledgeable about it and then allow you to make the right investment decision in the future.

7 Golden Rules of Investing - Invest in what you know
7 Golden Rules of Investing – Invest in what you know

Read Also: Are dividend stocks good for young investors?

7. Beware Of Fear And Greed

Perhaps the most important rule of investing is to avoid the traps caused by your own fear and greed.

Basic human emotion is the greatest enemy of profitable investing.

You can be a short-term day trader or a Warren Buffett-style long-term investor, a disciplined approach is a key to profit from investing.

All successful investors plan each investing decision, they ask a few questions before they buy, or sell a stock.

Before they Buy:

  • They ask themselves the reason why they want to buy a certain stock and not the other:
    • Is it because that others are buying, thus they buy?
    • Is it because someone said it is good, thus they buy it?
    • Is this buying decision emotional, or because it is the right decision?
  • They check if they are falling into the trap of Greed before their investing decision.

Before they Sell:

  • They ask themselves the reason why they want to sell it now and not later, or earlier:
    • Is it because that others are selling, thus they sell?
    • Is it because someone said it is the right time to sell, thus they sell?
    • Is this selling decision emotional, or because it is the right decision?
  • They check if they are falling into the trap of Fear before their investing decision.

Don’t let your emotion take control of your decision. Making your investment decision based on facts and figures will allow you to be much more successful in investing.

7 Golden Rules of Investing - Beware of fear and greed

Read Also: Ways to profit from a Market Crash

What Do These Golden Rules Of Investing Mean To You?

In order for any investor to be successful, each has to follow a set of rules as a guideline when making each investment decision. But amount all rules, there are a few that stand out the most, and these are the Golden Rules of investing.

7 Golden Rules of Investing:

  1. Don’t follow the crowd
  2. Invest don’t gamble
  3. Know the value, know the price
  4. Diversify
  5. Don’t listen to expert’s forecast
  6. Invest in what you know
  7. Beware of fear and greed

Regardless if you are a growth investor, a dividend investor, or a value investor, these rule of investing still applies.

Rules of profitable investing allow small investors like you to perform well in investing. And understanding these rules lets you have an unfair advantage over all other investors and even perform better than the professional fund managers on wall street.

Knowledge of investment can be learned from books or articles like this one. Reading can only make you wiser and smarter, so that you too may be able to make the right decision in your investment.

“Education is a progressive discovery of our own ignorance.”

Will Durant


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