There Are No Rules In Investing!

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

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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.

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