6 Investment Rules


wealthymatters.comThe secret to doing well in stocks over the long term is to avoid making big mistakes rather than being spectacularly right a few times in one’s career.After all it just takes just one big enough mistake to wipe away all the gains of the previous years.The following checklist is to help avoid making major mistakes.

1. Avoid following the crowd.
Avoid the hottest stocks in the hottest sectors, which are invariably priced high.It’s far safer and more profitable to invest in stocks of companies that are either well-known but currently out of favour or not tracked at all by analysts often simply because they are too small to be of interest to institutional investors.

 2. Look for consistently positive cash flow and beware of debt.
Share holders make money through dividends.The company first needs to throw off cash through its operations to be in a position to reward shareholders consistently.Debt reduces the surplus available for share holders.Excessive debt might kill a company in bad times.

 3. Avoid serial acquirers and if necessary buy stocks of good companies after big acquisitions.
Making many small acquisitions or one big one are both fraught with peril, yet some managements insist on engaging in such behaviour regularly. They often fritter away the resources of their companies and shareholders in this way.If you must buy a company that has just made an acquisition buy after the deal , when the share price has dropped , not in the frenzy before the deal.

4. Avoid IPO’s where the company has no earnings to speak of as yet.
They are pure speculations.These companies may never earn anything or if they do, the risks run are never commiserate with the gains.  Keep in mind Peter Lynch’s admonition in Beating the Street: “Long shots almost always miss the mark.”

5. Don’t bet against the shorts.
A high short interest should always be a huge warning flag, as short sellers are often extremely smart and analytically rigorous. Shorts aren’t always right, but if you’re going to bet against them, you’d better be awfully sure of yourself.

 6. Keep it simple.
As Warren Buffett says:”Easy does it. After 25 years of buying and supervising a great variety of businesses, Charlie and I have not learned how to solve difficult business problems. What we have learned is to avoid them. To the extent we have been successful, it is because we concentrated on identifying one-foot hurdles that we could step over rather than because we acquired any ability to clear seven-footers. The finding may seem unfair, but in both business and investments it is usually far more profitable to simply stick with the easy and obvious than it is to resolve the difficult.”

About Keerthika Singaravel
Engineer,Investor,Businessperson

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