Key Investment Principles

On this page we outline the key principles and tips which every investor should know, to avoid making mistakes which lead to losses. Don't forget these! Print them out! Stick them on your wall! If you stick to these principles you will be on the path to a strong portfolio.

Best Practice from the Experts

  • Only invest what you can afford to lose
  • Never go long term in volatile stocks but always be prepared to have funds locked in for worst case scenario.
  • Diversified portfolio
  • Don't fall in love with a company
  • Avoid stocks with wide spreads
  • Employ stop losses sensibly, trail when necessary specifically on non pre-determined exits.
  • Make sure shareholders and Directors are aligned
  • Nobody ever went broke taking profit. No matter how small.
  • Ensure liquidity is sufficient should you need to it. Liquidity is there for exits, not for entry.
  • Stay away from the herd sometimes. Trying to jump for a boat that's already left the dock you'll end  wet or drown. 
  • When it rains gold put out a bucket not a thimble.
  • CEO's are second hand car salesman, don't buy a ford because he told you it runs like a Mercedes.
  • Markets are the only place where there's a sale on and everyone runs out of the store. Buy the Dip.
  • Focus less on if youre right or wrong and focus more on your probabilities of being right or wrong. Being right on what you deem a low probability trade idea can give you a false sense of being good. Being wrong on what you thought was a high probability of success trade is more than ok. The rest is about risk and streamlining your process in picking out trades and being open to letting that process evolve.

 

Other Considerations:

  • Sector/Industry (advantages, pros and cons). Macro economics
  • Niche market?
  • CEO history and credibility
  • BOD credentials, key people and qualifications
  • Evaluate company vision and strategy
  • Share price history (charting)
  • Good entry price, support and resistance points. moving averages 50/200 DMA. Fib levels, momentum oscillators, MACD/RSI.
  • Number of shares in issues/size of free float and market capitalisation (undervalued?)
  • Fundamentals (revenue, profit and loss history, cash flow)
  • Access to funding (debt based vs dilution)
  • Investor relations/communication
  • Directors holding and at what prices
  • Institutional investors and financiers.
  • Assets owned
  • Consider area of business: stability/(geo/)political turbulence
  • Prospects: near term and long term
  • Recent RNS history
  • Expected news flow
  • Broker ratings
  • What do the analysts say (podcasts and newspaper articles, FT)
  • General investor sentiment at the current time
  • Summary of what the bulletin boards are saying and associated social media hype
  • Enter after a placing
  • Select investment strategy appropriate to the circumstance: short vs long / Trading vs holding

Mass Psychology points to Keep in Mind:

  • The leaders represent less than 2% of the population yet take in more than 90% of the profits. Getting to this stage is not easy as it involves changing one’s fundamental modes of behaviour. You need to do the opposite of what your emotions dictate when it comes to the markets.
  • You have to learn that when something is popular the end is very near
  • When an investment is viewed with disdain or frowned up, then the time to open a position is close at hand.
  • You have to learn how to fight the fear of selling out to fast after taking a position, remember it won’t just go up., most likely it could even go down a bit more or move sideways for months or even a year. The one area you can draw comfort from is this, the longer the sideways action, the stronger the upward move will be when it finally transpires.
  • Keep extra money on hand so that you are in a position to open additional positions at an even better price.
  • In all likelihood you will have a 50-100% retrenchment in the first stage of the bull market, meaning that your shares could double and then shed a significant portion of the gains.; this is known as the shakeout phase, whereby the weak hands are forced out of their positions and end up selling at or very close to the bottom.  Holding on to the position usually, leads to huge rewards.
  • When the investment suddenly starts to become popular with the masses,  be on guard and a perform simple trend line analysis on all your holdings.  Once the long-term primary uptrend shows signs of wear, start banking your profits and tighten your stops.
  • Wait patiently for the next opportunity to show up, there is always another opportunity.
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