“The investor’s chief problem — and even his worst enemy — is likely to be himself.” — Benjamin Graham
There are seven investing rules that have stood the test of time. They are not unique or new. Like Mom’s chicken soup for a cold, the rules are the rules. If you follow them, you succeed. If you don’t, you don’t.
As the U.S. stock market, represented by the S&P 500 Index SPX, -0.16% is near a record high, it’s especially important to heed these rules.
Here they are:
1. Sell losers fast; let winners run: It seems like a simple thing to do, but when it comes down to it, the average investor sells his winners and keeps his losers, hoping they will come back to even.
2. Buy cheap and sell expensive: You haggle, negotiate and shop extensively for the best deals on cars and flat-screen televisions. However, you will pay any price for a stock because someone on television told you to. Insist on making investments when you are getting a “good deal” on it. If it isn’t, it isn’t. Don’t try to come up with an excuse to justify overpaying for an investment. In the long run, overpaying ends in misery.
3. This time is never different: As much as our emotions and psychological makeup want to always hope and pray for the best, this time is never different than the past. History may not repeat exactly, but it surely rhymes awfully well.
4. Be patient: As with item No. 2, there is never a rush to make an investment and there is nothing wrong with sitting on cash until a good deal, a real bargain, comes along. Being patient is not only a virtue, it is a good way to keep yourself out of trouble.
5. Turn off the television: Any good investment is never dictated by day-to-day movements of the market, which is merely nothing more than noise. If you have done your homework, made a good investment at a good price and have confirmed your analysis to be correct, then the day-to-day market actions will have little, if any, bearing on the longer-term success of your investment. The only thing you achieve by watching the television from one minute to the next is increasing your blood pressure.
6. Risk is not equal to your return: Taking on risk in an investment or strategy is not equivalent to how much money you will make. It only relates to the permanent loss of capital that will be incurred when you are wrong. Invest conservatively and grow your money over time with the least amount of risk possible.
7. Go against the herd: The populace is generally right in the middle of a move up in the markets, but seldom right at major turning points. When everyone agrees on the direction of the market due to any given set of reasons, usually something else happens. However, this also cedes to points two and four: To buy something cheap or sell something at the best price, you are generally buying when everyone is selling, and selling when everyone else is buying.
Those are the rules. They are simple, yet impossible to follow for most. However, if you can incorporate them into your thinking, you will succeed in your investment goals in the long run. You most likely will not outperform the market on the way up, but you will not lose as much on the way down. This is important because it is much easier to replace a lost opportunity in investing, but it is impossible to replace lost capital.
As an investor, it is your job to step away from your emotions and look objectively at the market. Is it currently dominated by “greed” or “fear”? Your long-term returns will depend greatly not only on how you answer that question, but how you manage the inherent risk.
Lance Roberts is chief portfolio strategist and economist for Clarity Financial. He is host of “The Lance Roberts Show,” chief editor of the Real Investment Advice website, and author of the Real Investment Daily blog and Real Investment Report. Follow Lance on Facebook, Twitter and LinkedIn.