There Are No Rules In Investing!

Do you think you can win the investment game by following rules? Think again!

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Wherever you look in the investing world, you’ll find countless experts all with their own rules. My own favourites are Warren Buffett’s top two:

  1. Don’t Lose Money
  2. Don’t Forget Rule 1

But other than general good advice like that, which really just amounts to common-sense, there actually aren’t any hard and fast rules.

I’ve often had newcomers to investing ask me how you can tell when a share is good value, and how to tell if a share is going to go up or down. But if there were any objective rules for deciding such questions, everyone would be winning all of the time.

In fact, for any share price at any given moment when the markets are open, the balance between people thinking it’s a buy and people thinking its a sell is precisely equal. It has to be, because as soon as the balance changes even slightly, the market price adjusts upwards or downwards to re-establish that balance between buying and selling.

Economics? Pah!

What about those who tell you the markets are heading for a new golden era based on a positive outlook for economic recovery? Or those predicting a crash because the economic portents from the East look foreboding? Well, it’s a common suggestion that if all the world’s economists were laid end to end they wouldn’t reach a conclusion. The fact is, there are no rules in economics either; there are just attempts at modeling and predicting. And those models and predictions get it right, except when they don’t.

What we need to do as investors is abandon all reliance on rules, forget trying to outguess the next person in the price-movement stakes, and stop looking for the next get-rich-quick indication. What should we do instead?

Strategy is everything

The key thing is to work out an investing strategy that you are personally comfortable with. It’s no use chasing super-high-risk oil explorers, for example, unless you have money you can comfortably afford to lose and you have steely nerves that can handle a volatile roll-coaster share-price ride. But if you do have those things, and you veer more towards the gambling end of the investment spectrum, then go ahead.

Similarly, while I’d strongly recommend investing in solid blue-chip companies that pay decent dividends, and then reinvesting the dividend cash and leaving it there for decades, if you’re young and potentially have many decades ahead of you and you want to take a higher-risk punt on some hot growth candidates, then why not?

In fact, your strategy may well change with age. When I started out investing in shares around 25 years ago, I used to like smaller cap growth candidates — and some did nicely for me, while others crashed and burned. Today I prefer shares that look to be highly cash-generative and should provide steady dividend income, especially when I can find them at prices that look undervalued — my two prime holdings with that approach are Lloyds Banking Group and Aviva (but even in my advancing years, I still find room for the occasional higher-risk and higher-excitement investment, albeit only with small sums).

It’s your business

In the end, my favourite bit of investing advice is independent of which kind of investments you favour. It’s to invest in companies, not in shares. What that means is you should focus on the business and its future potential, not on the share price and where it might be going — the former is the horse, the latter the cart.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Alan Oscroft owns shares in Lloyds Banking Group and Aviva. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Illustration of flames over a black background
Investing Articles

2 red-hot UK growth stocks to consider buying in April

These two growth stocks are performing well, but can they continue to deliver for investors through 2024 and beyond?

Read more »

Charticle

Is JD Sports Fashion one of the FTSE 100’s best value stocks? Here’s what the charts say!

The JD Sports Fashion share price remains a wild ride during the first quarter. Could it be one of the…

Read more »

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »