Investing basics: 3 rules that helped me become a better investor

Investing basics may seem simple, but they are fundamental to the success of any investor, whether first starting out or with years of experience. James Reynolds lays out the four rules that guide his decision making.

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Investing basics may seem simple, but they are the foundation on which all successful investors base their decisions. Many of my best decisions were made when remembering these rules. And many of my biggest mistakes were made ignoring them.

No one’s making you swing

Warren Buffett once compared choosing investments to batting in a game of baseball, save for one key difference. There’s no rule that says you have to swing. This means I can take the time to really think over every opportunity that comes my way, and if I’m not 100% certain it’s a good bet, I don’t have to take it. This has meant I’ve missed some great investments, but there’s nothing wrong with that. There will always be more opportunities, more chances to swing. And when it comes to my hard-earned money, it’s better to play it safe.

Don’t be lazy. Do your research

It really doesn’t take much effort to learn a little about a company, and that research can be the difference between making a great investment and losing lots of money. Of course, I need to know what I’m looking for, so I ask myself:

  • Does the company offer a product or a service?
  • Is it expensive to run?
  • Does it have a lot of competition and if so, does the company have an edge over similar companies?
  • Does it have a lot of debt or large profit margins?

Most of these questions can be answered by looking at a company’s financial statements and by using a bit of common sense.

Don’t buy the news

It’s important to keep up with the news and know what’s going on in the wider world. The problem with following the news too closely is that it can cause us to invest reactively rather than proactively, leaving us always one step behind the market.

One of the biggest mistakes I ever made was buying shares in a company that had just made the news because the stock price had gone through the roof. Shortly after, the price crashed. Because I was a novice investor, I panicked and sold. The entire process just cost me money and caused me stress.

Now I do my research first and never buy a company I hear about in the news.

Investing is a marathon, not a sprint

Every single person on the planet is susceptible to the influence of two key emotions. Fear and greed.

It’s fear that makes us sell our shares when the market goes down, and greed that pushes us to buy when prices are at all-time highs. If I don’t keep these emotions in check, I might as well just burn my money.

The trick is to remember that investing is not about making money today. It’s about building wealth over the long term.

The best thing I ever did was buy shares and forget about them. Prices will fluctuate up and down in completely unpredictable ways for years, and I realised that if I spent my days watching them, I would only lose the strength of my convictions.

All investing brings with it risks but our job as investors is to manage those risks and try to stack the odds in our favour.

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.

James Reynolds has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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