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These Timeless Pieces of Wisdom Will Aid You On Your Wealth Journey

A friend of mine is as close to being a “day-trader” as one can get when your employer has a mandatory 30-day holding period for equities. He makes probably 15-20 trades a week. But lately, he’s sitting on tons of cash, and he’s super upset about it.

We have the same talk almost every day. “Nothing looks cheap. Everything is at all-time-highs.” The S&P had just broken 2000 for the first time in history.

I keep telling my the same thing. “There’s nothing wrong with sitting in cash for a while. Wait until things cool off, and snatch up the bargains. You’ll do much better that way than trying to guess whether stock ABC is going up or down in a market like this.”

If you’re holding high-quality stocks for the long-term that pay dividends, and the market is at all-time highs, you’re pretty safe overall. Even in significant market correction, world-dominating businesses do fine and experience low price volatility.

But if you’re trying to day-trade or time the market in small cap stocks, and there’s any significant risk of correct in the market, you’re just asking for trouble.

It’s times like those that you’re best off sitting in cash and taking a break to do some learning. After all, learning is the first and most important step in invest. First you learn about how investments work, then you learn how to identify opportunities, then you execute your strategy and manage your risk.

I hope many of you are in this situation. So, let’s take some time to review some basics as a sort of “investment check-up.”

1. Remember that there is no crystal ball.

No one that comes to you with the next hot stock tip really knows what the future holds. Stocks could go up tomorrow, or they could crash. You won’t get rich overnight in safe stocks. Speculative investments have their place, but they should not make up a good portion of an investment portfolio. Be an investor first, a speculator second. Invest in companies with great value that are selling at discount or fair price, and only speculate when the odds are very much in your favor.

2. Start small and work your way up.

Not all assets are equally prices or valued at the same time. Plowing right in once you first open a brokerage account will only ensure that you’re getting ripped off in one asset or another. Some writers refer to losses you take early in your career as “investing tuition”—the money it costs you to learn valuable lessons. We obviously want to minimize this.

So if you’re just starting out, don’t put all your money to work right away. Even now, I don’t have all my money at work, and I’ll explain more about that below.

Cherry-picking deals by watching what we publish here at SI is a good way to ease your way into a variety of investments at the right time and price to ensure that whatever strategy you’re using, you’ll be gettting a great value and increasing your returns in the long run.

3. It’s OK to do nothing—don’t give into FOMO (Fear of Missing Out)

My most successful investment strategy has always been to park most of my investments in cash-gushers, and secondly to have a good amount of cash handy to snatch up any killer market deals that come along. By killer deals, I’m talking about the kind of situations where money is almost literally sitting on the ground, waiting to be picked up. It’s the cash pile left when the safe has fallen from the sky and cracked open. I just walk over, pick it up, and give it a good home.

Just don't sit on your money forever--indecision can also be fatal

4. Be fearful when others are greedy, and be greedy when others are fearful.

This is actually one of The Oracle’s (Warren Buffet) maxims. The idea is that whatever the herds of average inestors are pouring into, we want to be far away from it. If everybody is buying into the market in record volumes, we should be worried about buying... out of fear that the buyers are getting exhausted, which would cause a stall or decline in the market. Conversely, if everyone has been in a selling panic and cutting their losses, its likely prices can’t decrease much further, and we may have ourselves a buying opportunity soon.

History always repeats, but many investors believe that “things are different this time.” Too often, they’re wrong.

Just be sure you’re not fighting the trend. You’ll end up cut, burned, or squashed. We’ve written other articles about this here and here as well.

5. If you don’t understand it, avoid it—but better yet, learn about it.

There are plenty of ways to make money work for you. Some strategies carry much more risk than others. As a lifelong learner, I recommend you learn as much as possible about different types of investments (especially ones that “professionals” consider to be “risky”, like options), so that when and if the time is right, and you see a bargain, you feel comfortable executing a strategy. You know that in the Village, we cover tons of strategies and philosophies. If you don’t understand what we are recommending, do not do it. Wait until you know more and understand the risks and payoffs.

6. Keep returns in perspective.

From time to time, evaluate the strategy you are using in context of your returns. Are your profits paltry compared with the general market? Are you going in and out of stocks too quickly and are commissions eating into profits?

7. Stick to your risk management plan, or revise if need be.

Whatever strategy you’ve chosen for position sizing and trailing stops, stick to it like glue. Doing this is key to preventing an account implosion and ensures that your portfolio value increased with time. Follow the links to respective articles on the imoprtance of using these two risk management methods.

8. Don’t diversify just for the sake of it.

I mentioned Warren Bufett’s “greedy” axiom above. Being greedy when the time is right implies you should take more than you normally would. This is at odds with the position sizing risk reduction strategy that says we shouldn’t be overweighted in one asset or security.

But diversifying just for the sake of diversifying makes even less sense than being overweighted on an asset. For examlpe, there is no merit in buying a “diversified” fund if it is heavily weightd with a lot of underperforming or overpriced assets. That will lead only to supressed returns.

Conclusion

These eight gauges are effective checkup tools for any investor—beginner or seasoned. If you stick to your guns on these rules, I don’t think you’ll find yourself in hot water anytime soon.

As for my friend—well, let’s just say I’ll be passing this article onto him today.

Live long and invest,

Jeremiah

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