Aside from sports, there are few fields in which there are so many platitudes, old saws, epigrams, rules of thumb, etc., than investing.
Perhaps it’s because there are few endeavors where you have to put it on the line like you do in sports and investing. There are clear winners and losers, and risk can be your greatest friend or your worst enemy.
Maybe that’s why there are so many diverse forms of advice. There are a lot of superstitions in both endeavors as well.
Whether the second cup of coffee with two sugars and some milk stirred clockwise at the opening bell or a lucky rock actually have magical powers isn’t really the point. It’s about finding tools that help you keep a clear head, so you remain alert, open and adaptable.
But there are some fundamentals that can help clear some of the debris from around your investing discipline. Below are two core concepts that will help every investor stay focused.
Rule No. 1: Investor, know thyself
You have to understand yourself as an investor. A lot of people simply throw money around. Gold’s hot? I’ll buy some. Forex is the new way to invest? I’m in. Trading platforms? Options? Shorting? Yes, yes, yes.
Instead, you’re much better off to do two things: Look to build a solid long-term portfolio of both growth and income stocks. This takes time, and it takes perspective.
If you have stocks that will endure, then market jumps and dives won’t matter much. The trouble with following the markets is that the role of the media is to make everything exciting. That means stories are built to be exciting, not analytical. They want to make you do something.
Most of the commercials on financial media are for brokerages, right? And most of those are advertising trading platforms.
And that’s the point. Trading and investing are two different things. You don’t trade an investment, and you don’t invest in a trade.
Investing is long-term, trading is short-term and ne’er the twain shall meet.
There’s nothing wrong with investing or trading or both or either. Just make sure you define your terms and don’t slide down the slippery slope of turning unprofitable trades into long-term investments to soothe your ego. If you’re in a bad trade, get out and look for more opportunities. Many investors are guilty of turning short-term losses into long-term losses this way.
I’ve known plenty of gurus who are great investors and lousy traders. It’s OK. The point is to make money by following a strategy that you understand and are comfortable executing.
Rule No. 2: Don’t believe the hype
Now that you’re investing, you’re working with a portfolio and you have found yourself monitoring and managing your investments, it’s time to find your cruising altitude.
To use another analogy, it’s like looking at the ocean. If you’re on the shore, you see the waves rolling in. If you’re on a boat, you can see the broader dynamics of sea and sky. If you’re in a plane, you get the context of the size of the entire body of water, but have little understanding of the individual waves.
You need to see the market through each of these perspectives, but you need to stay somewhat aloof to the wave by wave action.
A good example is Apple. The world of devices can be nasty, brutish and short. Do you want to invest in Apple, or Samsung… or hedge your bet by investing in the companies that manufacture the components inside the devices?
Different suppliers make the camera, the processor, the audio chip, the cover glass, the camera… with 72 million iPhones sold last year, these suppliers can be good investments, or not, depending on whether or not Apple continues to use them.
If Cirrus Logic, a company that makes mobile audio chips, reports lower than expected quarterly results and weaker sales guidance because either iPhone sales wane, or a device maker stops buying it’s audio chips and the stock price drops… well, you have to decide if you want to spend all your time following those kinds of investments or not.
You have to know yourself, and decide if you want to ride those waves up and down.
I often write to you about investing in gold. Governments around the world are pumping more cheap money into the system, so gold is perking up.
And with so much cheap money flying around, it will be difficult to slow down the money supply with any economic growth, creating rapid interest rate rises and a devaluing of major currencies.
Hyperinflation, as Bob Livingston has warned, is the inevitable outcome
Once we get to the point where paper money has gone from treasure to trash, it will draw investors back to gold — as it has for the past millennia — as the only real reserve currency.
So, will fiat money finally fall and set off a domino effect that will leave the established financial and banking system in ruins? And will gold rise again, Phoenix-like, from those ruins, and re-establish itself as the only real source of value in the chaos?
To me, gold is always a store of value. It is not money anymore, although it might be again before too long. The financial media bring you hyped-up headlines about “soaring gold!” when it’s gone up or down just a few dollars. They want you to buy and sell, generating commissions and profits for their industry. They want you to trade on the hype.
Instead, I want you to invest in gold for long-term value… assuming you can block out the sound and fury signifying nothing.
The difference brings us back around to my two rules: If you know your own mind, and then guard it against the hype, you can be a successful investor.
— GS Early
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