The Two Essential Rules When Investing in Stocks

Stock prices do not always go up. But investors can protect themselves from the worst gyrations of the market with two basic rules to investing in stocks: know yourself, and stick to your knitting.

Do Stock Prices Always Go Up?

Here’s a quick financial market history lesson: Stocks do not always go up. Some companies go bankrupt. A surprising number of sovereign governments default on their debt. Financial markets are volatile and, most of the time, not easily forecasted.

There are two rules that anyone that wishes to start investing in stocks need to know: “know yourself” and “stick to your knitting”. With these as your foundation, you can easily achieve reasonable and excellent returns.

Know yourself. Successful investing has everything to do with setting your objectives and ensuring, by studying financial market history, that your expectations are realistic. Parenthetically, market history is not the past five or ten years. These years are all part of the same Deflation Era and offer little insight into the likely returns over the coming five or ten years. If instant gratification is part of your expectation set, just give your money to your favorite charity. A crucial part of your self-knowledge is how much money you can afford to lose and how you’ll react when your portfolio declines by 15 or 20%.

Stick to your knitting. If you hope to outperform the experts, you must have a comparative advantage. Surprisingly, this is easy. Most investors have bad plans and execute them poorly. The most deadly errors are trading excessively, refusing to recognize and eliminate mistakes and risking too much capital on a particular bet. Decide how you want to make you money, develop a plan and stick to that plan knowing that there will be times when the market will not reward your effort.

Remember, if investing in stocks were easy, everyone would be wealthy.

6 years ago