RULES OF INVESTMENT SUCCESS

I was just flipping an article which was forwarded by my Professor on "10 basic rules for successful investing" and decided (just for the fun of it) to check out in the “world wide web” on other successful investment rules…. My goodness, there are hundreds of rules available to choose from (up to your heart’s desire…)

However, I am captivated by the 16-rules of investment success by Sir John Templeton (the founder of Templeton Funds), which are :

Rule 1 : Begin with a prayer

Prayer helps you think clearly and make fewer mistakes. Meditation is known to reduce anxiety and stress, helping in better decision making.

Rule 2: Invest for maximum total real return
It is important to only consider the total real return i.e. the money you make in your investment lifetime after inflation and taxes. Many investors get carried away by short-term movements. They tend to ignore the long-term opportunities. Thus, it is wise to invest for total real returns.

Rule 3: Remain flexible and open-minded
Flexibility comes from being agile. Open-mindedness is learning from new ideas and perspectives..

Rule 4: Invest, do not trade or speculate
Almost all successful people in the stock market are investors and not traders. They invest for long-term and are patient. There are many investors who have become millionaires solely on return of one stock in their portfolio over a decade. Sure they bought lot of other stocks which went nowhere but the one or two stocks that did well made all the difference. Traders think of the market as a casino where you play daily to win, investors think of markets as a long-term wealth building exercise.

Rule 5: Search for bargains
Just as we buy garments at discount sale, we need to buy and not sell stocks when markets are crashing.

Rule 6: Don't buy market trends or economic theories
You should not rely on economic theories and market trends while investing as they are told only after the event has occurred.

Rule 7: Diversify across assets and across markets, there is safety in numbers
To spread risk, investments should be diversified across assets such as:

- Stocks / equity mutual funds
- Bonds/ bond mutual funds
- Gold/ gold exchange traded funds
- Real estate
- Foreign mutual funds
- Traditional assets such as fixed deposits and public provident funds

Rule 8: Do your homework or hire experts who will do it for you
Some of us invest based on tips and rumours, that is speculating not investing. You should read and research all investment ideas well, take time to understand the upside and downside of each investment before buying. Or else, you must engage quality financial advisors before investing.

Rule 9: Aggressively monitor your investments
No investment is forever. Expect change and react to it. There are no permanent bull market and bear market.

Rule 10: Don’t Panic
Many people panic and exit the market when there is a dip. It is better to sell before a crash not after.

Rule 11: Learn from your mistakes
The only way to avoid mistakes is not investing which is the biggest mistake of all.

Rule 12: Beating the markets is a difficult task
Even professional fund managers have tough time doing it. Hence, an investor should remember that getting above market returns year after year is difficult.

Rule 13: Buy low
So simple in concept, yet so difficult to practice. Humans tend to think in herds and not alone.

Rule 14: Anyone who has all the answers doesn’t even know the questions
Markets make even the most brilliant fund managers humble. We have seen big fund managers make wrong decisions. An investor who thinks he knows everything doesn't usually know anything. Success is a process of seeking out answers to newer questions.

Rule 15: There is no free lunch
Never invest based on a tip or rumour. Everyone talks about their profits however small and no one talks about their losses however big.

Rule 16: Do not be fearful or negative too often
There will be corrections and crashes in the markets, but markets do recover and reward diligent and patient investors.

In addition to the above rules, for your investments, you might have to pay a heavy price for even small mistakes that you do. Here are the seven most common blunders that investors make.

Mistake 1 : Believing that trading is the same as investing
When you buy and sell stocks and mutual funds at the drop of a hat (read – without any research or planning), you are essentially ‘trading’. This will not help you to build long-term wealth. Yes, this is a fantastic way to make money, but for your broker, not you!

Mistake 2.: Being too conservative with your money
‘Real returns’ is the keyword here. These are returns post inflation. Putting away money in safe options such as bank depositsand so on might give you a negative real return. This is true especially in times of high inflation, such as now

Mistake 3 : Being too aggressive with your money
This is just another way to lose money. Pumping money into high risk avenues, such as equities, without understanding can prove dangerous. A Warren Buffet saying sums it all up -- To finish first, you have to first finish!

Mistake 4 : Keeping the ‘duds’
It is important to invest in good quality stocks, choose a good fund manager, invest small amounts at regular intervals and hold for a long term. That will make money for you.

Mistake 5 : Incorrect asset allocation
Too much of debt for the long term or too much of equity for the next quarter, is a sure fire way to leave you with little returns. It is wise to build a portfolio based on your risk capacity and financial goals.

Mistake 6 : Timing the market
Even experts cannot time the markets, leave alone investors. No one knows where the markets are headed in the short to medium term. Hence, it is foolhardy to time the markets. Instead, a disciplined investing, irrespective of market levels, pays off in the long run.

Mistake 7 : Overconfidence
If you hit a couple of ‘home runs’ (as the Americans say), you start to believe that you will continue to hit home runs regularly. This is true for most of us -- we attribute our recent success as our creation and therefore we think we can repeat it. This overconfidence can lead to a big portfolio disaster.

Now, feel confident enough to start some investing?