1. Think long-term.
“Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.” –Warren Buffett
Warren Buffett says money doesn’t grow overnight. ” No matter how great the talent or efforts, some things just take time. You can’t produce a baby in one month by getting nine women pregnant. ” So your investment planning should be done by considering longer terms goal.
If you want to build wealth through stocks, then you need to think long term. Most of the stocks take at least two to three years time frame to give good returns to their shareholders. Moreover, the biggest wealth creators are those stocks which have been in your portfolio for over a decade. In short, thinking long term is the key rule of successful investing and creating wealth.
2. Invest consistently.
Most people start investing in the bull market- when the market is high, the economy is good and everyone is happy. However, when the things turn around (bear market), many of them back out. Either they take everything out of the market or stop investing further. Nevertheless, if you ask any seasoned investor, then you’ll learn that the bear market is the best time to invest. This is the period when most of the stocks are trading at a discount.
This second rule of successful investing advocates that you need to invest consistently. Maybe, you can wait for some time horizon if the market is high and no stocks are trading at a reasonable valuation. However, it doesn’t mean that you should take a gap of five years and then enter again in the market.
If you want to build wealth from the market, you need to invest consistently. Moreover, you also need to increase your investment amount continuously.a
Many people invest their money just by hearing anything good about a particular company from others. By understanding the business, you can determine if there will be any associated financial problems in the future. There are many companies in the stock market whose business can be understood by any normal people.
“Do not keep all your eggs in the same basket.” This is the grandpa rule of successful investing. If you invest in just one stock, and it doesn’t perform (due to whatever reason), it can easily destroy your complete wealth. However, if your investment is diversified (5 or more stocks), then the chances of a single stock hurting your entire portfolio is significantly reduced.
“Minimizing downside risk while maximizing the upside is a powerful concept.” – Mohnish Pabrai
You can buy anything by taking loans and borrowing money, but you become rich by living on borrowed money. People initially think that they can manage their debts but not everyone can do so. One needs to have a solid plan to pay the debt back and not become its lifetime slave. A debt-free life is the best life. Warren Buffett says I’ve seen more people fail because of liquor and leverage – leverage being borrowed money. You really don’t need leverage in this world much. If you’re smart, you’re going to make a lot of money without borrowing
6. Invest in what you believe in.
There’s a famous quote by Peter Lynch- one of the most successful fund manager and the author of the best-selling book ‘One up on wall street’- ‘Invest in what you know’.
This rule of successful investing gives the veto power to the investors. If you do not believe in any stock, then just don’t invest. It takes a lot of willpower to hold the stock when the prices are going down and your portfolio is in red. If you do not believe in a certain stock, it will be the first one to be sold when the prices are going down (no matter how strong/weak are its fundamentals).
Therefore, invest in what you believe. First, convince yourself why you want to invest in that stock with reasons and facts. If you truly believe in the future potential of that stock, only then invest.
A lot of investors buy stocks just because they are cheap without understanding that cheap is not always better. Buffett learned from Charlie Munger that “it is far better to buy a wonderful business at a fair price than to buy a fair business at a wonderful price.” Chances of losing money in cheap stocks are very high compared to investment in a fairly valued stock
8. Ignore the short-term fluctuations
The stock market works on sentiments- GREED & FEAR. In short term, the people sentiments run the market. Therefore, the prices are doomed to fluctuate. There are thousands of factors that run the market- Economy (globally or locally), stock fundamentals, technicals, politics, international relations, government policies etc. And the public reaction on all these factors moves the share price. However, in the long term, the consistent performance of the company will dominate any other factor. Therefore, if the company is fundamentally strong, ignore the short-term price fluctuations and minor setbacks.
A stock market is a place where nothing is certain. So always be prepared for the worst. Many tragedies can happen overnight that can destroy your capital. Problems don’t give any warning before coming. Always save some funds for emergencies and never expose your full capital in any investment option.
10 Invest what you can, when you can.
Even an investment of Rs 500 is good enough to invest. Do not wait for your next bonus or next pay raise to start investing. Always remember that time frame plays an important role in the power of compounding. You do not need to start investing only when you have lakhs of money.
The easiest ‘hassle-free’ way to build a secure future is to invest what you can and when you can. Next time, whenever you have few spare changes, think about this last rule of successful investing