The Five Rules of Investing Intelligently

I) Know the Business

Warren Buffet always says that when investing he sticks to his, “Circle of Competence!” He knows Coca-Cola, Gillette, Geico…but computers are a mystery to him, so he doesn’t try to invest in that area. This is why the first rule to successful investing is to know the industry you’re investing in, as well as the people in it. For example, if you know about web developing then invest in websites; if you’re an art expert, invest in art…and so on.

Find your passion.

The main reason for this rule is to decrease the chances of failure and to avoid the trend follower’s mentality. The pit of losers is filled with trend followers and speculators and we’re not speculating, we’re investing!

II) Don’t Leap, Creep Forward

I’ve already talked about the difference between speculation and investment in this post. Speculators take higher risks for some low rewards and usually, due to natures of statistics and chances, lose most of their investments. Speculators love to chase trends and illusions, and when you chase something and want to be ahead of other, you need to be really fast, or at least to start the chase before others – and that’s like predicting the future. Us investors don’t predict future, we just buy and hold!

The second rule needs to really separate you from speculators. You need TO BE PATIENT and let the investment time to pay off.

III) No Sucking Thumb

As I said, we can not predict the future! This is why we spend our money (time and energy) and we wait for the payoff. If you can handle the risk and have a nice reward, then you shouldn’t hesitate to “pull the trigger.” Also, be a person of action and not one that sits on his or her hands waiting for things to happen. You acquire adequate knowledge, test your judgment multiple times and carry out with the decision.

IV) Invest in Value

Be a value investor and not a price investor; when investing, focus on the real value of that “product” and not on the price tag. I don’t know if you heard about this concept, but there is a price and also a value of a product, that’s almost always different than the current price.

Price – how much money you pay for it (a price tag),

Value – how much (money) you can get/save/lose after some time,

Also, from this, you can separate investments from luxury – investments have high value and low price, but luxury has a high price and low value. Let’s talk examples when investing in a:

  • New car – high price but low value => luxury (unless you drive for a living),
  • House/apartment (for renting) – high price and okay value => investment, but maybe not a good one,
  • New business – with low prices and high returns over time! => investment…

So the rule here is to search for products that are low priced but high in potential value, as well as to spend more on investments instead of luxury until you can afford it!

V) Margin of Safety

“You don’t drive a truck that weighs 9 900 pounds across a bridge that says limit 10 000 pounds because you can’t be that sure about it! If you see something like that, go further down the road and go by one that says limit 20 000 pounds.. and that’s the one you drive across.” – the famous lesson on margin of safety.

The concept is simple; your goal is to decrease the risk and increase the reward as much as you can. I use the rule, “one to two,” where if I risk 1$ I make sure I’ll get around 2$ afterward. This way you need less than 50% of successful investments in order to be profitable.

Conclusion

Read, read, read… the only way to get ahead. New information can change the way you see about an investment. Follow the rules and you’ll be safe, and as always practice, practice, practice some more…Some books to read for a good start:

  1. “The Intelligent Investor” by Benjamin Graham,
  2. “Rich Dad Poor Dad” by Robert T. Kiyosaki…

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