Investing

Nadeem Wayalet AKA The Market Oracle believes we can't win against the elites. And in order to not fall behind we need to do what we can to protect ourselves. One of the main ways to do that is to invest in hard assets such as businesses, housing, land and stocks. And invest in our selves through life long learning.

This post lists the golden rules of investing, but only briefly. Future posts will cover these points in more detail, until then, AI can explain any or all of the following points in more detail.

Some of the items in the list are contradictory, there are not absolute rules you can always rely on. For example, you want to sell a stock when the price is overvalued, but you also want to hold a good stock for a long time. Read the rules over and over again, and use experience with a paper trading account to learn how to apply them.

Investment Approach

  • Invest in companies that have a bright future and understand why they have a bright future
  • Have a rule to not sell stocks after buying for a certain period of time in months or years
  • Emotions make it hard to sell high/buy low: use Good Til Canceled (GTC) limit orders to remove emotions
  • GTC orders can catch short-lived opportunities (market often over-reacts, both up and down)
  • Adjust your GTC orders as the markets and valuations change
  • You cannot pick the top or the bottom, so don't try
  • Remember the market will not do what you want it to do
  • Often simply holding a good stock will result in higher gains

Valuation

  • Prioritize Earnings Going Forward (EGF) and Price to Earnings (P/E) over stock price
  • Note P/E ratios can become very high for companies that are doing very well (e.g. 500+)
  • A company can become more valuable while it's stock price declines: e.g. earnings are growing
  • A company can become less valuable while it's stock price increases: e.g. earnings decreasing
  • Recognize that stock prices often reflect market sentiment, not the underlying business value
  • Be prepared for stocks to "consolidate" (go sideways) for long periods (e.g. full year)

Buying

  • Use GTC orders with an aim to accumulate stocks when undervalued
  • Scale your orders: the lower a target stock price comes down, the more shares you buy
  • Forget about profits during a bear market, the objective is to gain exposure
  • Dollar-cost averaging can be used during bull markets to build positions
  • Buy stocks after a price plunge only if the company has become more valuable (e.g. lower P/E)
  • Don't buy too soon after major breakouts, often the stock will fall back

Selling

  • Use GTC orders with an aim to take profits when a stock is overvalued
  • Scale your orders: the greater a companies overvaluation, the more of their shares you sell
  • Selling a very good stock can be a big mistake as an opportunity to buy it back may not appear
  • Trimming into rallies can reduce exposure to expensive stocks plus lock in profits
  • When selling, don't sell all at once, be looking to sell more at a better price
  • Never sell at a loss

Portfolio Management

  • Monitor your stocks; if a stock is constantly on your mind, your exposure is too high
  • Keep at least 15% in cash to allow accumulation during market corrections
  • Increase exposure to winners and reduce exposure to losers
  • Do not rely on market indices as an indicator of what the stocks you are interested in will do
  • Ride out states of overvaluation, which may lead to a stock going nowhere for a year or more

Long-Term Perspective

  • Market movements are driven by fear and greed rather than rational analysis
  • All drawdowns (stocks in a loss) are temporary and double-digit drawdowns are normal
  • Good companies recover quickly from market downturns so have GTC orders in place to take advantage
  • Forget about prices you bought (or sold) at in the past, that is emotional

Emotions

  • emotions make it hard to sell when the price is up, hard to buy when the price is down
  • emotions make you feel if you bought or sold at a price in the past, you should get that price again

Additional Points

  • Patience is important, the market rewards those who wait for opportunity and punishes those who do not
  • Be grateful for falling prices (buying opportunities)
  • Be wary of FOMO (fear of missing out) and buying just because everybody else is
  • Do not trade options
  • Do not use stop losses
  • Do not use leverage
  • Do not short: shorting carries unlimited risk
  • Ignore mainstream media and blogs, focus on valuations
  • Better to own the best stocks than an index fund of good and bad stocks
  • Inflation means one has no choice but to invest in stocks