Three Simple Rules Of Investing

I was reminded the other day of a story that I first heard when I was no more than knee high to a grasshopper. It concerns a blundering elephant, an impulsive snake and a greedy fox.

The elephant, it transpires, accidentally trod on the snake, which retaliated by biting the pachyderm on the leg. The snake’s venom instantly killed the elephant, which subsequently fell onto the snake and crushed it to death.

A greedy fox, which happened to be passing by the two dead animals, thought that Christmas had come early. It devoured both the elephant and the snake in one sitting. But it too died. It had over-eaten.

Investing lessons

The moral that we learnt as children was to think before we act. So unlike the elephant, we should look before we stumble into something dangerous.

We should also, unlike the serpent, learn to control our emotions. Losing our temper might seem like a satisfying way to respond, when we are wronged. But it can have unintended consequences.

And finally, we should never, like the fox, be too greedy. We should be content with moderate gains. Often it is not necessary for us to attempt extraordinary things to get extraordinary results.

Who would have thought that something we learnt as young children could be applicable decades later when we invest?

When we buy shares, we should find out everything we can about the companies we invest in. There seems to be some unwritten rule in the stock market that if we don’t understand something, then we should sink every last cent we have into it.

A share, as Peter Lynch pointed out, is not a lottery ticket. It represents a part ownership of a company. We owe it to ourselves to find out as much about the business as possible. And if we don’t understand it, then don’t invest in it.

Valuation matters

We should carefully consider what we believe the company could be worth some time in the future. As Warren Buffett pointed out: “If the future of a company cannot be predicted, then it cannot be valued.

Consequently, we should try, as best as we can, to put a value on the business. Unfortunately, valuing a business is not an exact science.

So, we should build into our valuations a suitable margin of error. We are never going to get the valuation completely right. But in investing, it is better to be vaguely correct than absolutely wrong.

As investors, we should also learn to control our emotions. If we can’t control our emotions, then we will find it very hard to control our money.

When to sell

Every investment that we make should be based on its own merit. It has to make sound financial sense. So never get too attached to a winner.

More importantly, we should not become so complacent about our winners that we forget to continually monitor the story behind the company.

So, be ready to sell when the story changes. Similarly, be ready to add to your investment when favourable conditions arise. The market is place where money is moved from the active to the patient. We have to be patient.

Holy Grail

Often, investors go in search of the Holy Grail of investing. The harsh reality is there is no Holy Grail.

There are no clever computer programs, no squiggly lines on graph paper and no magic formulas we can apply that would guarantee success every time.

There are only the rules that we were taught when we were children. So we should think carefully before we act; we should learn to control our emotions and we should never allow greed to overrule logic.

A version of this article first appeared in Take Stock Singapore. Click here now  for your FREE subscription to Take Stock – Singapore, The Motley Fool’s free investing newsletter.

Written by David Kuo, Take Stock - Singapore tells you exactly what’s happening in today’s markets, and shows how you can GROW your wealth in the years ahead.

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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 Director David Kuo doesn’t own shares in any companies mentioned.