Four Golden Rules Of Investing

Investing mistakesThe fact that it is so easy to investing into world class businesses through stock exchanges around the world is both a blessing and a curse for investors. With the stock market, regular investors like you and me gain access to companies we would have never been able to buy into if they are private. However, because it is so easy to buy and sell your stakes through the stock exchanges, investors might be tempted to make buy and sell decisions more often than they should. According to Robert Hagstrom, author of The Warren Buffett Way and The Warren Buffett Portfolio, the rule of investing boils down to four main points.

Let’s take a look at the four golden rules of investing.

Limit Yourself to Companies You Know

There is no point in buying every company you come across. Opportunities are plenty in the stock market but so are the traps, if we buy into every company we heard about, there is a high chance we will get hurt more often than not. On average, buying 15 companies give us more than 85% diversification, more than enough to ensure our portfolio is well diversified.

Buy the Best

When we see an opportunity in an industry, it might be better to just buy the leader of the pack instead of investing in every one of them. If the industry is set for good times ahead, most likely the leader will enjoy most of it anyway. Companies such as Keppel Corp (SGX: BN4), CapitaLand Ltd (SGX: C31) and Singtel (SGX: Z74) can be considered leaders in their field.

Buy For the Long Term

It is important for investors to buy investments with a long term view. If you are not prepared to hold the companies you invested in for at least 5 to 10 years, maybe it is best to not invest as all.

Foolish Takeaway: Market is Irrational Most of the Time

The market is a volatile machine. It does not serve any purpose worrying about the short term sentimental effect of the market. Just because the price of a stock is cheap now does not mean that it cannot get cheaper in the future. The best thing to do once we have decided is to fasten our seatbelt and weather through the storm. One is for sure; there is always a rainbow somewhere after the rain.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim doesn’t own shares in any companies mentioned.