These 33 Commandments Should be Set in Stone
Steven is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
As investors, we often fail to reflect on our past experiences that brought us to where we are today. Investing is a lifelong endeavor and sometimes it pays to take a gander in the rearview mirror from time to time. Finding your own path is the single most important step towards building the right portfolio. Throughout the years, I’ve collected some best practices I integrate into my investing approach. From the budding investor, to the seasoned veteran, there is always something new to learn from the experience of others. Here’s what I think are the most important elements to becoming an all-star investor.
1. Invest in what you know. Peter Lynch said it best. The more knowledge you have about an industry, company, or product, the greater understanding you have during the evaluation process. In 2003, I knew my Apple (NASDAQ: AAPL) iPod 3rd generation was way ahead of the competition and was captivating a large audience. Later that year, I purchased my first Apple PowerBook G4, and after experiencing firsthand how far ahead Apple was in computing, I bought shares for a split-adjusted $17.
2. Read annual reports. This single most important duty as an investor and it’s negligent if you don’t. Read all the risk factors the company has identified. Familiarize yourself inside and out with a company you are courting for a long-term engagement.
3. Invest ahead of the curve. Think about out which stocks will do well tomorrow, not today. Today has already come and gone. Tomorrow’s winners aren’t always today’s darlings. As a starving college student attending the University of Colorado, I immediately familiarized myself with Chipotle’s (NYSE: CMG) menu. I had a leading edge of insight of how popular this restaurant had become in a buzzing college town. Thinking about rule #1, I got invested in the $40’s the year McDonald’s (NYSE: MCD) divested itself.
4. Periodically revisit your thesis. Review quarterly reports, earnings transcripts, and press releases to ensure your thesis is still intact. Make sure you are still investing for the same reasons that compelled you to buy in the first place.
5. Never stop learning. Always challenge yourself to learn something new about the industry you favor. Stay up on industry trends and developments because it will help you down the road.
6. Develop your own point of view derived from your research process.
7. Defer gratification and be patient. Life is a long journey and so is investing. Investing helps secure a better tomorrow. The sooner you acknowledge this, the faster you’ll get on track. Had I taken my own advice, I’d have game changing returns in both Apple and Chipotle. Instead, I had to settle with 35% returns on the initial entries.
8. Sleep on it before taking action. If you’re selling, remind yourself why you bought it in the first place. Personally, I've extended this rule by waiting a week before selling because I often get excited to take-the-money-and-run.
9. Don’t rush. The stock market isn’t going anywhere. If it takes you a few extra weeks to conduct more thorough research, wait until you have a better picture. Timing doesn’t matter if you’re talking about decade-long horizons.
10. If you are unsure, don’t swing. Sometimes the best idea is no idea at all.
11. Learn from the mistakes of others. It’s more affordable that way.
12. Don’t count your chickens before they hatch.
13. Don’t watch CNBC or listen to sell-side analysts. It’s distracting and clogs your mind. You need a clear head to find the best companies.
14. Don’t chase performance. It’ll make you tired and unfocused.
15. Don’t force it. You might hurt yourself.
16. Keep it simple. Buying shares is the single best way to accomplish this. In my experience, buying and selling options makes #12 difficult to avoid.
17. Get off the twitter feed and refer to #13.
18. Have faith in humanity. A healthy dose of skepticism is important, but if you don’t have faith in the human race, long-term investing is near impossible.
19. Develop a shopping list for a rainy day on your favorite issues. Take action when the market is panicked and you’re scared. Your future self will thank you for being brave.
20. Be flexible. You never know where your next epiphany will come from.
21. You can’t own every stock. This is crucial to acknowledge in order to focus on finding the best stocks for you.
22. Trust yourself, not the market. You’ll likely be tested before you’re rewarded. Find strength in your research.
23. Have courage in your beliefs because you did your homework.
24. You will fail at times. Embrace it by trying not to repeat it. Some experiences are more expensive than others.
25. You will miss big opportunities. Don’t dwell over it because you can only make money in the future. This is easier said than done, but dwelling for too long will rattle your focus. If I dwelled on letting go of Google (NASDAQ: GOOG) in the mid 300’s, I might have missed the boat on other successful investments. If you need extra reassurance, see rules #21 & #23.
26. If you fail, get back on your horse, lick your wounds, and refer to rules #1-6.
27. Be honest with yourself. The Motley Fool Caps game is great way to see how you really fare against the market over the long-term. It’s a fun and easy way to make yourself accountable. Sometimes we only remember the winners, and with this tool, you can have a friendly reminder of our mistakes.
28. Don’t be greedy because pigs get slaughtered.
29. Start small. Rome wasn’t built in a night and neither was a great portfolio.
30. Build a portfolio of core holdings prior to investing in unproven growth companies. International Business Machines (NYSE: IBM) is my biggest core position. I think they offer a huge amount of future potential and could destroy Google search.
31. Reinvest dividends to enhance returns.
32. Contribute often. Investing should be a financial priority as important as buying a house. Budget monthly, in the form of auto-savings sent directly to your brokerage account. Figure out how many cents of each dollar saved should go towards investing. Don’t make it too large that you’ll run the risk of withdrawing from your account earlier than expected. Refer to rule #7 for more clarification. And remember, compounding is an investor’s best friend.
33. Keep extra cash for rule #19.
A Brief Reflection
Over the years I’ve violated every one of my own rules. With each passing year, I violate fewer and fewer. By the time I’m due to retire in 30-40 years, this list will likely be longer and have evolved to better suit my future needs.
Investing styles may change over ones lifetime, but there is one element I don’t think will ever change. Investing will always be more of a mind game above anything else. Anyone can break it down and analyze the numbers, but not all can endure the pain of being wrong. Investing is an emotional process and knowing our triggers can help diffuse some of our irrational tendencies. Writing down a personal set of investment commandments helped me greatly. And it may do the same for you.
*Bonus Rule: The late Steve Jobs once said, “Stay hungry. Stay Foolish.”
TopDownTrends owns shares of International Business Machines. The Motley Fool owns shares of Apple, Chipotle Mexican Grill, Google, International Business Machines, and McDonald's. Motley Fool newsletter services recommend Apple, Chipotle Mexican Grill, Google, and McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.