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16 Thoughts: Investing and Financial Safety

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    July 16, 2013

    While I am on vacation this week with my family in California I am spending some of my downtime reviewing old notes, past research and just thinking about what is important to financial “security.”   Financial security is about not only the investing correctly but also the things that are important to long term capital preservation.  The following are some thoughts in this regard and cover both rules of investing as well as rules of capital preservation.

    1. Buy low-sell high.

    As obvious as this seems it is the one thing that most investors do exactly the opposite of.  Your ability to consistently buy low and sell high, will determine the success, or failure, of your investments. The simple reality is that 100% of your rate of return is determined by when you enter, or leave, the stock market.

    2. The price of the stock market is always right.

    The only thing that truly matters in investing is the price.  The trend of the price of the market is the only thing that matters.  If prices are rising – then you are long the market.  If they are falling; you are in cash or short.  What you “think” the market should be doing at any given time is irrelevant.  With all things being equal, the longer you stay right with the stock market, the more money you will make. The longer you stay wrong with the stock market, the more money you will lose.

    3. Every market or stock that goes up will go down; and most markets or stocks that have gone down, will go up.

    The more extreme the move up or down, the more extreme the movement in the opposite direction once the trend changes. This is also known as “the trend always changes rule.”

    4. Your career provides your wealth.

    You most likely will make far more money from your business or profession than from your investments.  Only very rarely does someone make a large fortune from investments.

    5. Don’t assume you can replace your wealth.

    The fact that you earned what you have doesn’t mean that you could earn it again if you lost it.  Treat what you have as though you could never earn it again.  Never, take chances with your wealth on the assumption that you could get it back.

    6. The trend is your friend.

    Since the trend is the basis of all profit; understanding both the long and short term market trends are useful in understanding the risks versus the reward in putting capital at risk.  Contrary to the short term perspective of most investors today, all the big money is made by catching large market moves – not by day trading or short term stock investing.

    7. You must let your profits run and cut your losses quickly.

    This is the key to investing success.  Trading discipline is a necessary condition of investment success.  If you do have a highly disciplined approach to trading – you will not make money over the long term.

    8. Traditional technical and fundamental analysis alone may not enable you to consistently make money in the markets.

    Successful market timing is possible but not with the tools of analysis that most people employ.  The problem with most analysis is that it is biased to sell product and is therefore is optimized, employs data mining, subjectivism, or other such statistical tricks to promote a specific perspective, opinion or objective.  Focus on what the data is telling you rather that what you want it to be.

    10. Never trust the advice and/or ideas of trading software vendors, stock trading system sellers, market commentators, financial analysts, brokers, newsletter publishers, trading authors, etc.,

    If the person giving you advice, or trying to sell you something, isn’t successful in their own right and aren’t trading their own money – then it is advice that is probably best ignored.  You should listen to those that have achieved financial success – they probably know something you don’t.  Keep in mind that Wall Street, and other financial firms, make money by selling you something – not instilling wisdom in you.  You should make your own decisions based on a rational analysis of all the facts.

    11. The worst thing an investor can do is take a large loss on their position or portfolio.

    You can avoid making that huge mistake by avoiding buying things when they are high.  It should be obvious that your starting point is critical in determining your total return, if you buy low, your long term investment results are irrefutably better than someone that bought high.

    12. The most successful investing methods require changes at the margin.

    A strong investment discipline requires patience, discipline and work.  However, once a portfolio is built and operational maintenance is function of changes at the margin.   Investing is a long term process with a view towards changes of trend.  Such a portfolio requires very few changes between major trend changes.   If you are trading regularly – you are speculating and will eventually wind up losing more money than you made.

    13. Don’t use leverage.

    When someone goes completely broke, it’s almost always because they used borrowed money.  Using margin accounts, or mortgages (for other than your home), puts you at risk to lose more than your original investment. If you handle all your investments on a cash basis, it’s virtually impossible to lose everything—no matter what might happen in the world—especially if you follow the other rules given here.

    14. Don’t ever do anything you don’t understand.

    Don’t undertake any investment, speculation, or investment program that you don’t understand. If you do, you may later discover risks you weren’t aware of. Or your losses might turn out to be greater than the amount you invested.  It’s better to leave your money in Treasury bills than to take chances with investments you don’t fully comprehend.  If you don’t understand it, don’t do it.

    15. Create a bulletproof portfolio for protection.

    For the money you need to take care of you for the rest of your life, set up a simple, balanced, diversified portfolio.  A portfolio of low risk investments, fixed income and a healthy level of cash will ensure that no matter what happens in the markets, or in you life, you will be in a financially sound position to handle it.   A portfolio should be able to survive any uncertainty that arises and in todays world there are plenty of uncertainties to choose from.  It isn’t difficult, or complicated, to build a safe portfolio and you can achieve a great deal of diversification with a surprisingly simple structure.

    16. Whenever you’re in doubt about a course of action, it is always better to err on the side of safety.

    If you pass up an opportunity to increase your fortune, another one will be along soon enough. But if you lose your life savings just once, you might never get a chance to replace it.  Always err to the side of caution and safety.   Always ask the question of what can go “wrong” rather than what you “hope” will go right.

    Images: Flickr (licence attribution)

    About The Author

    Lance Roberts – Host of StreetTalk Live
    After having been in the investing world for more than 25 years from private banking and investment management to private and venture capital; Lance has pretty much “been there and done that” at one point or another. His common sense approach has appealed to audiences for over a decade and continues to grow each and every week.

    Lance is also the Chief Editor of the X-Report, a weekly subscriber based-newsletter that is distributed nationwide. The newsletter covers economic, political and market topics as they relate to the management portfolios. A daily financial blog, audio and video’s also keep members informed of the day’s events and how it impacts your money.

    Lance’s investment strategies and knowledge have been featured on Fox 26, CNBC, Fox Business News and Fox News. He has been quoted by a litany of publications from the Wall Street Journal, Reuters, The Washington Post all the way to TheStreet.com as well as on several of the nation’s biggest financial blogs such as the Pragmatic Capitalist, Zero Hedge and Seeking Alpha.