As I write this in early March, the stock market is nearing correction mode (a 10% decline from a recent high) and some predict a bear market (a 20% fall from the previous high). I thought it was timely to share my Top 10 Tenets. These investment principles support a sound investment philosophy. They have guided me through 40 years of major market moves and have been invaluable to me. I hope they are of value to you, too.
Investing Tenet #1…Be Disciplined
Investing is not for the undisciplined. As a stock investor, a disciplined approach to research and using buy and sell rules are critical to the investment process and success.
Investing Tenet #2…Know Yourself
This is the ‘Be true to you’ rule. Knowing your unique investment parameters and constraints will help you stay true to you. It is required due diligence.
Investing Tenet #3…Control Your Emotions
This tenet could be #1. Successful investing requires a high “EQ” (“Emotional Intelligence”). Greed, fear and hope have no place in investing. It has been said, “Emotions are your worst enemy in the stock market.” Build a rational plan based on your goals and stick with it.
Investing Tenet #4…Time-In, Not Time-ing
A key to successful investing is time; it is the amount of time in, not the timing, that matters. Time in the stock market does two things: It reduces risk and avoids the cost of being out. The longer the time in the market, the lower the risk.
Investing Tenet #5… Process before Product
Investing is a process. In fact, it is a never-ending process. Every investor should have a strong understanding of the investment planning process before buying any investment product. I maintain a 6-step process beginning with a clear statement of investment goals and objectives. The last step is “On-going Monitoring”.
Investing Tenet #6…Go With What You Know
As Warren Buffet puts it, “If you don’t understand it, don’t buy it”. Being aware of what you trust, buy, use, and like can lead to a common-sense approach to investing.
Investing Tenet #7… Minimize Losses & Maximize Gains
Minimizing losses is a critical, non-negotiable investing rule. Avoiding large losses and holding on to winners for possible extreme gains is the path to wealth accumulation and preservation in the stock market.
Investing Tenet #8…Concentrate for Accumulation & Diversify for Preservation
Too much diversification can dilute profit potential. Too much concentration can be harmful, also. Knowing your investor-self will help you with concentration vs. diversification. The best of the two is determined by which is best for you.
Investing Tenet #9…Be Contrary, not Ordinary
Sir John Templeton said, “To buy when others are despondently selling and to sell when others are euphorically buying takes the greatest courage but provides the greatest profit.” Contrarian investing may feel counter-intuitive, but it is a proven investment approach.
Investing Tenet #10…Put Risk Before Return
Last on the list, but not in importance. #10 is the heart of my investment philosophy: “Investing is a process that should be based on a disciplined approach to risk management.” Strive to minimize the risk inherent in all investments before chasing returns.