Investing can be both profitable and pleasurable.
Despite the fact that many financial directors and wealthy investors look as though the stress of making money has caused more misery than joy, you don't have to lose your joie de vivre in order to make money on the stock market.
Here are six golden rules that should help increase your wealth.
1) Locate the sweet spot
Every share has one. It is essentially the price at which it is undervalued.
Now it can be difficult to find, but when you do discover a share priced to go it's intensely satisfying and potentially very profitable. You may need to exercise lots of patience of course!
2) Don't forget to KISS
Keep it simple stupid. Research is essential but over analysis can lead to paralysis. What you need to decide is whether the share in question has a few simple attributes:
- Is turnover consistently going up?
- Are pre-tax profits increasing each year?
- Does the management seem focused on shareholder returns?
- Is it undervalued?
3) Avoid group action
If you follow the crowd, it is mathematically impossible to deliver a market beating performance. That is why the most successful investors are contrarians, hunting alone for lesser-spotted ten baggers.
Of course, when lusting after a quick profit, it is surprising how easy it is to ignore the small voice of caution that tells you not to follow a path blazed by hordes of others. Yet, that very voice, if heeded, can prevent you making monumental errors of judgement.
4) Know your boundaries
This is what Warren Buffett refers to a 'circle of competence'. Essentially, if you step outside it, you could be entering a world of pain. Stick to what you know and understand -- this should result in fewer mistakes.
For example, I generally avoid investing in oil and mining shares, as I haven't had time to get to grips with some of the more technical aspects of their operations. I miss out on a few great opportunities to make money, but many more where I suspect that I'm far more likely to lose a packet.
5) The head must rule the heart
It's best to keep emotions out of investing, otherwise you inevitably risk becoming attached to a share. It's a constant battle, as with every share purchase you are investing with a certain amount of hope.
Remaining faithful to a share that continually disappoints you will ultimately prove just as unsatisfying for your finances as indulging in one-night stands with all manner of stocks.
Similarly, greed is a very counterproductive emotion. When you find a new opportunity, wait a week and look for any weakness in your analysis before making a purchase.
6) 72 is the most important number
As that great investor Walter Schloss pointed out, it is important to remember the rule of 72, which helps you work out how compound interest can increase your wealth.
Divide 72 by your expected rate of return to find out how long it will take your money to double. So a return of 9% should double your money every 8 years, and so on.
More from Chris Menon:
