10 Crucial Investment Principles You Need to Have
It's been a crazy year in the stock market and crypto. You hear people making these insane gains trading Tesla Stocks and Dogecoin and you somehow convince yourself to buy it at the top mainly due to the fear of missing out (FOMO) and then the bubble burst and you got rekt. You then tell yourself investing is not your forte and you're just going to stick to fixed deposits. Well, it doesn't have to be that way.
That's why in this week's ONE THING, I will discuss the 10 crucial investment principles you need to have as a successful investor.
10 Investment Principles 📈
- Capital Appreciation and Dividends: Capital appreciation is the primary way to make money in the stock market, by buying low and selling high. The other way is to get regular cash payments in the form of dividends for owning the stock
- Buy Low, Hold, Then Sell High: Many people are caught up in the pattern where they purchase a stock when it's at a high, due to FOMO, and then selling it later on because it didn't work out. Investing is not buy high, sell higher, but buy low and sell high
- Recognize and Avoid Speculative Bubbles: As a general rule of thumb, if your friend who knows nothing is buying into a particular asset, run. This is a sign that the herd has moved into that particular investment
- Ignore the Noise: Noise is everywhere when it comes to the stock market. In most cases, the best move to make is to do nothing. Keeping up with the stock market drama is a great way to make a poor investment decision
- Stock Market = Pendulum: You want to buy from the pessimists and sell to the optimists. Optimism is equal to greed and pessimism is equal to fear. The market is like a pendulum, it always goes swinging back and forth from fear to greed
- Diversify Your Investments: I'm a believer in concentrated bets in high conviction plays, but most people don't have the time or insight to build that conviction. That's where diversification comes in handy
- Dollar-Cost Averaging: Many people attempt to time the market based on charts and news. Good luck with that. What you should do is spread out your investments over a period of time in relatively even amounts, so as to get the "average" of the market
- Do Not Over-Diversify: Holding a large number of different stocks is not diversifying. This is just unorganized chaos. A general rule of thumb as a beginner is to own no more than five stocks
- Understand Share Price Value: Is a $5 stock cheaper than a $500 stock? The answer is no. It's all about the market cap, market cap = outstanding shares * share price. This will tell you what the market is giving as a value of this company
- Long Term Tax Advantage: If you trade stocks frequently, these short term capital gains will be taxed as income but long term capital gains will be taxed at a lower rate
Understanding and following these 10 investment principles will shorten the learning curve of becoming a successful investor. These investment principles may seem simple but trust me when I say that even the most veteran investor will ignore them when emotions come into play.