Being a good investor takes certain mentality. I just wanted to share some rule of thumb with fellow beginners. This is also a reminder to myself as I may have violated some of these rules lately which could cause unnecessary losses…
Rule #1: Think long-term (at least 5-10 years)
No one can guess what could happen to the stock price today or tomorrow. Buying a stock is same as investing in a business. If you buy a profitable restaurant business for $100K, would you sell it after a couple weeks just because its market price drop to $50K? Of course not. Don’t worry about the daily stock price movement but focus on the underlying business’s health, management’s long term strategy and how your investment thesis is playing out.
Rule #2: Don’t invest more than what you can lose
In general, if you invest money, (albeit slim chance) you have to mentally and financially be ready to lose all your investment. When you overextend yourself like borrowing money to invest, it may cause irrational decisions such as selling after 50% price drop because of fear of not being able to pay back the loan (or margin calls).
Rule #3: Use common sense to analyze the macro trends
The long term industry trend can generally be analyzed using common sense and some simple statistics. Will the healthcare spending increase or decrease in future? Which country’s population will be growing in the next decade? Will people be eating more healthy or less healthy?, etc. For example, the fall of Kraft-Heinz could have been avoided if you watch closely on how people are becoming more health conscious nowadays.
Rule #4: Don’t be afraid to miss the “next big thing”
After all, most of the time, hitting a jack pot IPO is a more or less a fluke in my opinion. Who can tell whether UBER drops or Beyond Meat skyrockets when they both are still losing money? If you don’t feel confident in the stock, you don’t need to buy it. Stocks with long history can still provide over 300% return easily if bought at right time.
Rule #5: Be smart on tax
In Canada, there are various tax sheltered accounts: TFSA, RRSP, RESP, etc. Understand the different nature of each accounts and allocate investment based on its nature. Learn about how tax treatment differs on dividend income, capital gain, etc. as well.
If you want to learn more about how to pick and research stocks, you can read my past articles. Follow and subscribe if you are interested in my future investing tips and stock picks!!