5 Rules To Help You defeat the market
Updated: Jun 19, 2021
When it comes to investing, the most important rule to follow is, be VERY VERY conservative.
There is an ancient Chinese saying in the Art of War: "Be at an undefeatable position, then seek victory." What it really means is before you seek victory, put your self in a safe environment first.
If we apply that in investment, it means exactly what Warren Buffett means. Make sure your money is safe, before you seek profit. So...
1.Protect Your Capitals
“The most important thing about investing is not becoming rich overnight, it is consistency over years.”
Warren Buffett: Rule #1, NEVER LOSE YOUR MONEY
Rule#2, When in doubt, please follow rule#1.
When people first started investing, they're always seeking to make hundred of thousands overnight, and get rich quick.
While it is true, stocks can get you rich quick, but definitely not overnight, and don't even think about it.
2. Avoid Derivatives
Before I understand the importance of protecting my capital, I always take huge risks. I invested in "Stock Options", used 50 times leverage on Forex Trading, you name it.
"My greatest record is that I loss over $20,000 overnight."
What happens later is that I ended up losing all my savings and owe lots of debt.
When I truly understand this idea, that's when I really started to make money.
Sure, Stock Options or Margin trades allow you to make bigger returns faster! However, it also puts your investment in a lot of risk. Risks you don't have to take.
For me, the reason I lose money, in most cases, is that I cannot wait... my stock option is expiring, my 50x leveraged trade will trigger a margin call. Either way, I will lose the money, because time is working against me.
3. Compound interest (the snowball effect)
Einstein said, Compound Interest is the 8th wonders of the world, and he is not exaggerating.
Imagine a snowball, start at the size of your fist, you roll it down from the top of a snow covered mountain. By the time the snowball reached the bottom of the mountain, it'll become the size of a truck, or even bigger.
Now, imagine the snowball is your money and that's compound interest in a nutshell.
When you invest your money($10,000), and you're earning a stable Return on investment of let's say 15% (easy), let's look at the table below and see how much we can make.
You triple your principle in 8 years, not bad... but not good enough?
Well, what if you can be a little bit resourceful and increase your principle to $20,000 or $100,000? You do the math.
4. Let time work for you
Time is the most important resource for stock traders, period.
In order for compound interest to work, you need time. Let time work for you, not against you. That is why you should never use margins and leveraged trades. It doesn't allow you to wait...
When investing, the worse thing you can do is invested money that cannot wait. If you invest money you need to spend in the next couple of months, don't...
Because, money flow to those who can wait.
In the stock market. People often lose money because they have to take the money out when it is still in red. DO NOT invest money you need to spend.
Because in the long term, stocks ALWAYS rise, if you can wait, LONG enough.
You'll eventually make money.
It's your choice to let time work for you, or against you.
So, what kind of company should I invest in? Simple, company that are traded at a discount!
How do I know when a company is at a discount?
One way to evaluate a company's value is by evaluating it's P/B (Price per book value). The value below 1.0 means the stock is trading at a discount.
Before you jump into buying a low P/B stock, remember this, P/B valuation only works with company that owns ONLY light assets, or assets that are Highly liquid, and easy to turn into cash. (ex: banks, financial institutes)
The reason it doesn't work with Heavy Assets is:
assets such as machinery, inventory or vehicles cannot sell for the price of it's value when the company bankrupts.
Or to put it plainly. invest in companies that is undervalued...
please read my other articles if you are interested in learning more about value!
That's a wrap!
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