Every investor gets into the stock market with the idea of buying low and selling high – and many find the general idea is easy to articulate but hard to do. And yet there are investors who generate billions of dollars in net profits. How do they do it? Here are five Golden Rules from investors with the best track records:
Rule #1 – Know What You are Investing In. Peter Lynch, who managed the Magellan Fund at Fidelity Investments between 1977 and 1990, believes that you must, “know what you own, and why you own it.” A mistake made by many novice investors is to equate buying stocks with opening a high-yield savings account. The two are very distinct, however. The latter pays you for allowing others to use your money. The former, by contrast, allows you to become co-owner of a business. Businesses, like all living entities, have distinctive behavior. And it is that distinct behavior that often portrays the hidden value of a winning investment.
Rule #2 – Look for Happy Customers Warren Buffet of Berkshire Hathaway is one of the most successful investors in history. According to him, the “behavior” of the business and how it relates to its customers is critically important. “If a business does well, the stock usually follows. One of the little known venues to investigate company behavior is how the company rates on the American Customer Satisfaction Index (ACSI). Researchers have discovered that while happy customers do not necessarily mean high stock prices, investing in companies with a high ACSI score will lead to a portfolio that consistently outperforms the general market.
Rule #3 – Diversify Against the Unknown No one has a crystal ball to see the future. The key to investing well, according to William O’Neil, a top-performing broker and inventor of the growth investing strategy, is to do your homework before you invest. But no matter how much homework you do, though, you can never know everything – there will always be some risk of the unknown. Because of this, you want some portfolio diversification. “Diversification,” says O’Neil, “is a hedge for ignorance.”
Rule #4 – Be a Long-Term Maverick The most successful investors agree with John Bogles, named one of the four investment giants of the twentieth century by Fortune Magazine, that “the historical data support one conclusion with unusual force: To invest with success, you must be a long-term investor.” Very few investors have the ability to generate $1 billion profits in a single day (as George Soros curiously did in 1992). But when you invest, place your bets against the grain of everyone else. In a typical Bear market, for example, people make irrational selling decisions and stocks become undervalued – this is a great time to buy. The same concept hold for Bull markets.
Rule #5 – Stay Away from the Thrills Getting into the stock market for the thrill of making a profit is short-sighted at best. Go to the movies or an amusement park if you seek thrills, not to your broker. Good investing is about putting your money to work for your future benefit, not about what’s exciting today. “If investing is entertaining, if you’re having fun, you’re probably not making any money,” says George Soros. “Good investing is boring.”