Can you imagine investing in the next big bang idea I come up with if I tell you that you’ll have to pay me money regardless if I make you money or not? I know — you’ll run as fast as you can.
It may sound oxymoronic, but that’s what you are doing when you let your hard-earned money in the hands of so-called pros.
We spend hours scouring the Web when we need a new car, but we seldom know the mutual fund performance or the track record of the fund manager who handles our money.
We feel pride in protecting our house and cars with insurance, but we seldom think about protecting our investment with the same fervor.
Can you ride the bull like a pro? Of course you can! — all you need is the commitment to — purge stereotypical rules of investing constantly regurgitated by the pros from your mind and embrace audacity to apply investment rules that can make you money.
1. Buy high, sell higher.
The common wisdom is to buy low and sell high. After all that’s what Warren Buffett does, right? Although I admire Warren Buffett for his simplicity and investment acumen, he invests his money in preferred shares. He lends money to fortune companies like GE with fixed interest income.
Buying low is akin to catching a falling knife for average investor. Those who invested in AIG, Enron and General Motors at their low have crucified their hard-earned money by following buy low and sell high mantra.
If you blindsided your desire to buy shares of Apple, Google, Bidu, Chipotle Mexcan Grill and many other stalwart investments of the past few years — you have turned a blind eye to an opportunity to grow your money faster than those pros on the street.
Most successful investors know — from the history — that stocks making “new highs” — that is, those reaching price levels not see in a year or more — tend to continue moving higher. Apple has gone up over 400% in last three years.
2. Beware the P/E trap.
One of the biggest myths of investing is the advice to buy low P/E stocks. P/E tells you how much you are paying for every dollar company earns. However, market always looks forward. What you are buying is the right to share in the future earnings. Adding to conundrum, cyclical stocks go through major ups and downs. Dow component Alcoa has returned net loss of 36% for the past year while its P/E ratio has dwarfed in the recent years.
Cisco Systems soared 75,000% from 1990 till 2000. Its P/E during this period was insanely over 40. Cisco has returned negative 5% in the last decade with a reasonable P/E ratio of 15.
You should not put all your eggs in one basket. But, not investing in a stock just because of its high P/E may be robbing you from an incredible opportunity to profit from its explosive growth and subsequent stock advance.
3. Have an exit plan.
Another equally insane idea is to fall into the long-term investment trap. Every investment requires careful planning, including exit strategy. Have you ever considered not buying insurance on your car or home? You don’t buy insurance with the hope to profit from it. You buy insurance to protect your car or home from unexpected loss.
Your other investments require same protection. If you purchased a stock that went down, it’s wiser to take a smaller loss and let your money work on other investment than to sit in the long-term investment camp and to hope and pray that your investment won’t turn its ugly head.
I sold one of my hotels right before Lehman Brothers collapsed in late 2008. I sold it to a buyer for $2.3 million which was less than what I wanted. I did that because the business had already begun its downward spiral. By selling it at $2.3 million, I was still able to make hefty profit. If I had waited for another year thinking that real estate is a safe bet, I’d have made a huge mistake.
Any investment is bad unless it makes you money. Smart investors cut their losses short and deploy their capital to an investment that can make up the loss. Everyone has different appetite for the loss. Nonetheless, you should never invest your hard-earned money unless you know precisely your aim to make certain profit or to take certain loss.
4. Average up not down.
This has always worked for me. You never throw good money after bad. When you average down, you are plowing more money into an investment that has gone against you. You do this with the hope that by bringing average price down, you have a better chance to break even when the stock price will rise. Well, many stocks never rise back from the coffin.
Instead, it is lot easier to buy some shares and watch to see if your investment decision worked in your favor. Then add more to your position as stock advances.
You really don’t have to invest in stocks if that’s not your cup of tea. Nonetheless, You should educate yourself with abundance of resources available to invest wisely in different ETF funds, Vanguard Index Fund or Templeton Growth Fund.
Over the years, I’ve made my shares of investing blunders. But, for the last few years, I’ve taken active interest in constantly learning what works.
My portfolio has returned over 30% for the last few years. And, it’s up again this year. All due to constant learning and applying these investment rules that work.
Take charge of your investments and banish the power of these so-called experts who don’t have your interest at the top of their priority list. It reminds me of Nike’s brilliant marketing slogan — just do it!
Risk comes from not knowing what you’re doing. — Warren Buffett