15 Rules of Investment: Learned From Market Trenches
Every investor has his/her own set of rules or investment philosophy. These are created primarily to help investors to focus on few key areas without getting lost in the complicated world of investment (especially where algorithms from big folks are dominating).
FRUGALITY is wonderful, good for personal growth, good for investment and good for environment as well. Good investors must practice to be FRUGAL.
Of course, have an occasional indulgence with your family for fun, but be "creative" in defining indulgence and fun. A Las Vegas trip could be great fun. And so as a family trampoline session !
FRUGALITY will ensure maximum savings, minimum discretionary expenses and maximum surplus cash for investment.
Investment shouldn't be your primary profession. Focus where your passion (if investment is your passion, think twice) resides or even chase [MONEY - STRESS] routes. As massive degree of PATIENCE and cash (to buy stocks, what else?) are required, it gets easier if you have a stable and satisfying career (investment can take care of your finance down the line) !!
Capital allocation in portfolio is a complicated topic.
To simplify, have a CORE portfolio strategy. This could be geared/normal index ETF funds or mutual funds
--OR-- a spread of good MID-CAP/SMALL-CAP companies with 10% allocation to LARGE CAP.
Once CORE is covered, take SATELLITE positions in some SMALL-CAP (even MID-CAP) companies having strong growth momentum (see RULE #6) as opposed just value investment.
PATIENCE is virtue. The rule is simple on surface but difficult in reality.
The investor's chief problem -- even his worst enemy -- is likely to be himself.
-- Benjamin Graham
Buy strong (with good ROCE that can sustain for years) companies at good prices (preferably under their intrinsic value; wait for correction etc.) and then PATIENTLY wait, wait and wait (at least 1 YEAR). Review fundamentals & management positions of portfolio companies once per month
Penny stocks are NOT always so cheap. Check EV/FCF Ratio (like P/E but more robust) or EV/EBITDA for quick validation.
If you're looking for a home run -- a great investment for five years or 10 years or more -- then the only way to beat this enormous fog that covers the future is to identify a long-term trend that will give a particular business some sort of edge.
-- Ralph Wanger
Have a few long-term themes for stock portfolio. It pays to keep up with trends. You’ll often find one or two SMALL-CAP companies that are in a unique position to benefit from the larger trends.
- Advanced Materials (Nanotech / Photonics)
- Biomedicine & Healthcare (Molecular Biology / Immunology / Photonics)
- Defense & Aerospace
- Financial Infrastructure (Inclusion)
- Food & Water
- Information Technology (IoT / Smart Services / Smart Home)
- Physical Infrastructure (Urban Development / Sustainable Living)
- Waste Management
DO NOT invest in businesses that you don't like or understand (Circle of Competence
Leave "Gold Rush" for Venture Capitalists and Private Equity investors. Not many miners struck it rich during the California Gold Rush, but the folks supplying picks, shovels, and blue jeans (think Levi Strauss) did just fine.
Invest in EVERGREEN businesses with Economic MOAT (by which Return On Cash Employed - ROCE- can be sustained over a long period)
Never invest a true technology stock (see Rule #8) but have instead focus on the companies and industries that will benefit from these breakthroughs. Technology is an "enabler" of a good business with Economic MOAT, but it is NOT an Economic MOAT itself. You can go to bed owning a promising stock with the latest technology and wake up with their main product obsolete because two kids invented something better in a garage somewhere. (Google and Facebook are two special tech companies having unique Economic MOATs)
Keep booking profit whenever there is 100% increase after at the least 1 YEAR of investment (Rule #3). Take out 100% to "free" the initial investment
Don't look at portfolio everyday
Focus/Invest on no more than 10-15 stocks at a time
Cash management is important. Stop the urge of buying in bulk. Keep buying strong companies (maintain watch-list(s)) at small amounts on dips - SIP (Systematic Investment Plan) style, based on their respective EV/EBITDA. Statistically, any stock (otherwise having strong fundamentals) with EV/EBITDA < 10 is a BUY.
Buy in a staggered manner especially when a bull-market experiences a crash. It's hard to pinpoint the exact bottom or 'U'
As you age, or your risk appetite decreases, focus on stocks that have consistently paid increasing dividends to shareholders. Typically this will be LARGE CAP companies (Think Coca-Cola !) with minimal growth. This will achieve three important things -
- Beat INFLATION
- Preserve CAPITAL
- Some CAPITAL gains
Surplus cashflow (MINUS expense for retirees) from dividends can be re-invested to same stock
--OR-- re-invested with a bit of diversification
--OR-- can be used to BUY growth stocks, depending on risk appetite.