Many of us want to emulate the successes of Warren Buffett and other highly successful investors. But while many would like to achieve these investing heights, very few of us ever achieve it.
Here are three secrets of highly successful investors.
Avoid losing money
This rule sounds obvious – but thinking about it more deeply shows why it is so important.
If we achieve 20% returns a year for four years in a row, then we’ll more than double our money. But a 50% loss in year five would take us almost right back to where we started. All it takes is one bad year to wipe away years’ worth of returns.
Warren Buffett knows this, which is why his first rule is “Don’t lose money“.
Rule number two? “Follow rule number one“.
Concentrate and then diversify
One of the best ways to achieve wealth is to concentrate our money into our best ideas and let these investments grow. As our portfolio becomes larger, it makes sense to start diversifying so we can protect our wealth.
Successful investors know that as their portfolio grows, the more damage a bad year can do.
They seek to minimise the damage by diversifying into other stocks and other asset classes such as property. If we have a portfolio of 20 stocks that are equally weighted – any stock that went bust with a 100% loss would deliver only a 5% total portfolio loss.
By spreading their risk, successful investors ensure that they are never in a position to be hurt too much.
Think long term
Highly successful investors know that long-term thinking is important. Warren Buffett has earned 19% per annum over his investing career, and he’s one of the richest men on the planet.
Never underestimate the power of compounded gains.
Create a plan
“I’m just going to invest and hope for the best” said no successful investor, ever.
Highly successful investors are disciplined and they treat investing as a business. When done correctly, investing can be financially rewarding and the stock market is a proven wealth builder.
However, just as the stock market builds wealth – it can also destroy it if we make too many speculative or unresearched investments.
Successful investors know what their goals are and they know exactly how they want to achieve them. Create a plan for yourself. work out a realistic target return and what would be needed to achieve that. It’s also necessary to create an investing checklist, so that we can filter out any bad stocks and ensure that we are putting our wealth to work properly in the stock market.
By following these four secrets of highly successful investors, you too can profit from the wealth that the stock market has to offer.
Views expressed 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.