Editor’s note: This article was first published in March 2014. Its reference to the Pescanova accounting scandal of 2013 and its list of investing greats, such as Buffett, Ackman, Soros and Lynch, reflect that time.
Good Christians start from a foundation they must respect within their religion (the Ten Commandments): something that keeps you on the right path, as basic as not killing, not stealing and not sleeping with your neighbour’s wife. In stock market investing there are also some basic commandments, and our “Moses” in this case is Andrew Beattie, one of the few financial writers who boasts of having read the Encyclopedia of Business and Finance from cover to cover. Over the years he has devoted to investing, he has been able to draw up his 10 commandments of stock market investing, which will keep you on the right path to returns and to protecting your money.
(Read also: The 7 deadly sins of business and finance)
1. You shall have clear goals and objectives.
You need a set of clear goals to guide your investment strategy. The strategy of a billionaire looking for a return on a €1 billion fortune cannot be the same as that of someone who is just starting out in the stock market. We also need to know our risk tolerance and be clear about the minimum time frame we need for our investment to pay off. If you don’t have a clear goal and don’t know yourself as an investor, simply avoid investing in the stock market.
2. You shall put your financial house in order.
Before going out to look for returns in the stock market, anyone who wants to start investing in shares should make sure their personal finances are in order. Investing without defined goals is bad, but investing while carrying debts that charge us high interest is the worst thing an investor can do. Remember that no investment will be more profitable than paying off your credit card debt, since the interest working against us will rarely be beaten by the returns we get on the stock market. Card debt and deferred bills need to be cleared before we get into the market. The most profitable and safest investment is paying off our debts.
3. You shall analyse company information impartially and question authority.
Stock market investing is not about numbers, companies, buying and selling. It is about investing in companies made up of people and run by humans, where humans buy and sell and where, sometimes, being sinful humans, they tend to lie.
Some CEOs lie about the company’s projects, audits are sometimes manipulated, and analysts working for investment firms are responsible for sending retail investors to buy, at inflated prices, a company that is really worth nothing.
You must question authority. That way, cases like Enron, the Spanish fishing group Pescanova and the dot-coms will not depend on market analysts, but on our own investment judgement.
4. You shall not follow the sheep.
The herd mentality in investing is what separates those who end up at the slaughterhouse from those who earn great returns. Sometimes the best time to buy is when everyone is recommending selling, and vice versa. Taking advantage of the herd’s mistakes can be our greatest advantage in the stock market, while chasing the herd has been one of the biggest mistakes investors have made ever since stock market investing has existed. (Read: Probably the mother of all investing mistakes).
5. You shall be humble.
If you take all these commandments seriously, the chances that you will earn higher returns than other investors are high. But be careful: always stay humble. Making money in a bull market does not make you an investing genius, since even a blindfolded monkey picking stocks with a dart would get it right.
It is when the market turns from bull to bear that we see who is a wise investor, depending on the strategy they adopt at that moment. Sometimes the smartest thing to do is to sell our entire portfolio. At other times the smartest thing is to hold and average down, depending on the type of company, and so on.
Whatever your returns on the stock market, there will always be people you can learn from and advice you should listen to. Not from just anyone, of course, but if you stay humble, you will always be a learner. Remember that the biggest failures on the stock market tend to happen to people who consider themselves experts.
(Read: The secret to making money on the stock market is in the Bible)
6. You shall be patient.
Whatever your experience as an investor, whether you are a beginner or an expert, you will always have two allies working for you: patience and time. Even in big market falls, many investors panic and sell, losing part of their money, forgetting about the dividends and the fact that once those sharp falls are over, those particular shares will rise in value much more.
Whether we are talking about being patient with long-term investing or being patient before making a hasty decision, always analyse the consequences of your decision and whether it is really the right strategy.
7. You shall be moderate.
Investing too much and investing too actively can make the stock market look like a casino or a game. It is often said that the pain of a loss has twice the emotional impact of the pleasure of a gain. That is why, when many investors are forced to sell their shares at a loss, what they do is look for another kind of investment in riskier shares or products, hoping to recover the lost money faster. Let’s say they go “all or nothing”. As a general rule in investing, this kind of strategy ends in nothing. You have to be moderate when gambling, so you should also show some moderation on the stock market.
See also: How is Warren Buffett taking advantage of the crisis?
8. You shall not look with lust and desire upon market movements.
Although there is no official study, the truth is that investors who follow the market every day and every hour tend to be tempted by the serpent into trading more actively. In other words, if you track your long-term investment every day, a fall two days in a row and three financial newspaper articles putting the fear into you will lead you to sin by selling your shares.
Constantly monitoring our investment tends to draw us into more active investing. And overly active investing is where the biggest losses of returns are found.
9. You shall diversify.
Bearing in mind that excessive diversification is a way of protecting yourself against ignorance (as Warren Buffett put it), the truth is that a minimum of diversification is very necessary. There is diversification for every investor profile, whether they love risk or are conservative. (Read: Which portfolio diversification is the most profitable)
10. You shall not worship any stock market god.
Warren Buffett, Ackman, George Soros and Peter Lynch are not gods. They are flesh-and-blood people we can learn a lot from, but many of their strategies make no sense for our investment capital, our needs or our profile. Likewise, they have information and access to direct sources that we don’t have. And most importantly, they also make blunders, in which they can lose 600 million dollars that for them is small change. A loss of €50,000 in our investment portfolio, on the other hand, can leave us “shivering” and with a few ulcers.
In short: you shall not sleep with your neighbour’s wife. And if you do, do it in moderation and use protection.
Further reading
- The 10 commandments for failing in business for sure
- What I learned about stock market investing in a gym
Featured image: Rembrandt, Public domain, via Wikimedia Commons.
