Core Investing principles
In this article, I’m going to share with you what I believe are the core investing principles everyone must follow in order to grow your wealth effortlessly.
Building wealth is simple – there are no secrets, no luck involved and you don’t have to be a genius.
It’s so simple that I can summarize it into one sentence – Spend less than you earn & invest the savings.
Even though it’s simple people usually avoid doing things that result in wealth accumulation. Wealth comes effortlessly when you develop habits that favor investing and when you follow timeless tried and tested core investing principles.
Before looking at the core investing principles, it’s important to keep in mind a few things to grow your wealth:
1. Start early—building massive wealth through investing takes years. So, the earlier you start investing the better the chances you have to be successful.
2. Avoid speculation—if you ever want to make a sustainable wealth through investing, avoid speculating. There is no luck and you shouldn’t treat the stock market as a gamble.
3. Mostly Invest for long-term—long term investment balances market volatility. Investing in the long term also has many tax advantages over short-term investments. This doesn’t mean short-term investments are bad. There should be a balance of both.
These 3 things are followed by the most successful investors.
Now let’s look at some of the most important Timeless core investing principles:
1: Your habits determine the growth of your wealth
Smart Investments x Consistency x Time = Wealth
To achieve anything in life, our daily habits play a huge role. Our financial habits determine how much wealth we’ll be able to accumulate in the future.
Through smart work (not hard work), consistent efforts and patience anything can be achieved.
Some financial habits can lead us to wealth and prosperity, while others can lead to financial struggles.
The Financial habits that will determine your wealth are:
1. Maintain a portfolio of your investments and review them periodically.
2. Budget your finances to figure out the leaks.
3. Create an emergency fund – without an emergency fund, you are risking a severe dent in your finances in case of a sudden emergency like illness, joblessness, or other. It’s important to create a liquid emergency fund before investing your savings.
4. Discipline is the key to a successful investment. It requires the disciple to follow business news and the world as well as national events, to stop you from compulsive shopping and regularly saving money.
5. Having an exit strategy. Exit strategy to every investment is necessary because otherwise you’ll stick with an investment too long and end up with nothing.
1. Excessive use of credit cards
2. Overspending on luxury
3. Buying everything on EMI
4. Ignoring credit score
5. Borrowing money even though you’re unable to payback
6. Treating your investments like a gamble
7. Not living below your means
2: Market is a pendulum
The market is a pendulum that is swinging periodically either from one side being a pessimist to the other side being an optimist. Neither pessimism nor optimism is sustainable.
Sometimes the market will be a pessimist and which means a bear market and the stock will be way down in value.
Sometimes the market will be optimistic, which means a bull market where the market has sky-rocketed.
What that means is to make money from the market you must follow the core investing principles.
The market is sentimental and moves up or down on emotions. It’s important for an investor to avoid behaving like the market, which is constantly swinging his decisions based on emotions.
Whenever you see the excitement in the market surrounding a particular stock or particular sectors understand that it’s very short term, based on sentiments and it’s not something that’s sustainable.
This doesn’t mean one can’t make money from that market excitement but it takes a level of risk and people generally lose money. Because nobody knows when the excitement will pan out and the stock will start dipping or it will keep going up.
3: Buy from the pessimists and sell to the optimist
In investing, you have to follow a simple funda, buy low, and sell high.
At the point of pessimism when the market is low and a particular stock is down and the price of that is actually below its actual value. That’s the time to buy from the pessimist people who believe the stock going to dip even further.
These pessimists are following the market that means they’re buying when it’s going up and they’re selling when it’s going down.
They are trying to cut their losses which is a losing strategy because your best bet is just to hold on as long as you made good investments in the first place but these people are looking to just cut their losses.
The reason being, they’re afraid of losing even more money and they’re following a terrible strategy, which is loss aversion.
Loss aversion generally costs people a lot more money than just holding onto those stocks for a little while.
It’s a great strategy to buy from those people who are following the market and trying to avoid loss by cutting their losses before they get worse.
As a short-term trader, you buy low at this point of maximum pessimism and then sell to the optimists when you feel that the actual price exceeds the value.
But if you’re a long-term investor, you shouldn’t really care about this pendulum swing and you just hold on to the stock no matter what. Because you understand that overall stocks increase in value when you’re in it for the long term.
One more thing that important to understand here is as an investor you make money when you buy the stock not when you sell the stock.
When you buy a stock, you understand the actual value of that share of ownership of that company you understand its worth in years to come.
So, you make money on the way in not on the way out. Because you’ve done your research, you know what that actual piece of ownership and that company is worth and you know what you will sell for down the road.
On the other hand, most people just buy a stock and they don’t really have a strategy in place or a plan they don’t even understand the value of that investment.
Smart investors always know the value of that investment, they have a price point on their mind and a buying point when the right time comes they know how much money they will make from that investment.
4: Price is not equal to the value
The market works on supply and demand and the mistake that many people make when they look at a stock they check the price of the stock and not its actual value.
This is one of the most neglected core investing principles: Price ≠ Value
Smart investors always look for stocks whose prices are below their value, not vice versa.
It comes down to its supply and demand and when you’re looking at a particular stock and you see that stock price has nothing to do with the actual value or the intrinsic value of that investment.
A lot of investors don’t realize that and they think the price of a stock fluctuates so much the value of that company fluctuates as well. When a stock price goes up a couple of pennies down a couple of pennies, every couple seconds on the actual market that doesn’t mean the value of that company is changing.
Yes, the value of the company changes over long amounts of time but in the short term, the value of that investment does not change it’s just the price that changes based on supply and demand.
As an investor, you understand the actual value of the ownership of that company and then have a set price in mind of what you want to pay. This way you’re looking at the value of that investment and not the price.
By doing that you’ll know when the value exceeds the price that’s a good time to buy and when the price exceeds the value that’s a good time to sell.
When you invest in a company you’re actually investing in part of the ownership of that company.
So you own a piece of all their assets you own a piece of all their earnings you basically are now a part-owner of that company even if the fraction of a percent you still own a small piece of that company.
A lot of people have disassociated with this fact they just think of a stock as the ticker symbol.
They really should consider themselves as part-owner of that company and take pride in their ownership. When you do that you are going to make more investments that are going to be ones that you’re going to hold for the long term.
Because if you’re just investing based on whatever stock is hot, you have no fundamental understanding of that company. You will be unable to make rational decisions when to sell or when to buy more shares of that company.
6: Stick to your core values
First of all, it’s important to understand what kind of investor you are.
There is an Active Investor who is committed to Investing and spends most of his time and energy understanding the fundamentals of a company and does hands-on- research and technical analysis.
These types of investors are more likely to get the most return out of their investments.
On the other hand, a Passive investor doesn’t spend as much time and energy on the market. They are not as disciplined as active investors when it comes to investing and mostly rely on tips and people’s suggestions when they invest their money.
Now after knowing what kind of investor you are, you have to understand what your core values are as an Investor or as a human being because you’re going to stick to those values.
A lot of people have certain values in society certain things that they do and things that are very important, no matter what that’s what you do and you’ll be there whether it’s pouring rain outside or no matter what happened the day before this is something that you do because it means a lot to you.
It’s important to look at your investing values as well as time-tested core investing principles the same way as you would look at that where this is something you do no matter
No matter how exciting investment is no matter what everyone else is doing you’re going to stick to your values as an investor.
So whatever values you decide on hold yourself to those values because that’s what’s going to help you protect yourself and not overextend yourself. or take on too much risk.
Write your investing values somewhere and refresh your memory every time you make an investment make sure you even do a checklist and following every single one of your investing values.
7: Ignore tips
A smart investor ignores all free suggestions or tips and relies on his own thinking and core investing principles.
Stockbrokers win when we are actively trading in and out of stocks we’re basically racking up Commission costs for brokers.
So when somebody on the television trying to motivates us to be active whether it’s buying a particular stock or selling a particular stock that’s when the brokers are actually making money.
When you listen or read these analysts’ opinions you’re going to start questioning yourself or you’re going to start second-guessing yourself.
There are websites where they post something good about the stock and on the same day, another writer writes something bad about the stock.
All they want to do is to generate some excitement so you should ignore the stock market news. In fact, I wouldn’t even recommend reading the news on your stock if you are investing for the long term.
Because you’re going to invest in the value of that company you’re going to research and learn about that company and understand the value it.
You’re going to understand their business and the sector in doing so you will have an idea where their business is going in the future.
Once you understand those things, these short-term opinions of stock market analysts won’t matter.
8: Patience is the key to generate wealth
There are always people who invest in the market who want to know how they can get 50% or 100% in one year.
It’s important to understand that those are not returns that you will see in a healthy market and the only way you get those returns is with high-risk investments.
When you’re making a high-risk investment, you are certainly not following these other core principles of investing. These people don’t understand the law of compounding.
With the power of compounding a 12-15% return over the years, you will make a lot of money. As long as you’re consistently seeing good returns you don’t need a 50% return every year to become a millionaire.
A smart investor understands that he needs to be patient with his investments and investing is a marathon, not a sprint.
When you are not patient with your investments and try to make money really fast by speculating there is a high risk involved. When the market turns, you will see a nasty correction.
Investing in penny stocks, trading on margin, or buying options contracts, buying futures contracts, are speculative investments and these types of investments are based on information that is perceived into the future not what we’re seeing today.
These kinds of speculative investments can take away the wealth just as fast as they generate it so someone who doubles their money overnight in the penny stock can lose that money just as quickly if not quicker.
9: Plan your trades on off-market hours
Its always better to plan your investments off-market hours.
When you want to buy a certain stock and you have a price point in mind before the market opens and if it doesn’t reach that price point you shouldn’t buy the stock.
Because you understand the value of that stock and you understand the price you’re willing to pay for that stock.
Make your trades off-hours and then set them to buy automatically at that price and if it doesn’t hit that price wait for another opportunity.
This is tough for many people because this takes a lot of discipline but this is a great way to make sure that you’re following your core values.
Understand that no matter how good you are as an investor, how intelligent your strategy is, how much you’ve researched or studied a particular stock, you can never fully eliminate the risk of being wrong.
It all largely comes down to being an informed investor and learning as much as you can about a particular investment before you buys it.
Having confidence in your investments is the key here. Because there will be people who’ll say the company, you invested is bad but when you understand the core fundamentals of that company you can defend your investments with confidence.
Another important thing is while investing you should decide based on rational thinking, not emotional thinking. Our protective mechanisms are actual human emotions are they’re very useful to us in society but they are useless to us when it comes to investing they are actually detrimental to our success as an investor.
When your stock goes down in value and that loss aversion is triggered you should wait for a second and say to yourself this is just the pendulum swinging to that side of pessimism. I’m going to hold on to this.
I hope you’ll keep in mind these core investing principles while investing so you can grow your wealth without much risk effortlessly.