Investing Rules
#1. Invest only the money you can afford to lose.
Investing starts with saving. But saving should be focused first on building the Emergency Fund and the Safety-Cushion Fund. This way any loss will not have any impact on the financial situation in the nearest future. What is more, it helps in emotional detachment from the money which in turn helps in emotion control especially during times of a temporary price depreciation.
#2. Always think aftertax.
When looking at investment opportunities, always think after-tax. Every individual's tax situation is unique. Always take into account the tax impact on the possible return.
#3. Invest primarily for cashflow, any potential price appreciation is only a bonus.
The cashflow is the most important when considering possible investment. Especially for Real Estate and private business. Even in case of the shares in the small startup companies without cashflow the research must be focused on evaluating possible future cashflows.
#4. Diversify, but conservatively.
Diversification is necessary. Diversification doesn't mean spreading the investment money between several stocks, but spreading the money between several investment instruments, like Real Estate, bonds, stocks in regular, IRA, Roth IRA and 401(k) accounts. This way whatever happens, the investor will not lose everything at the same time.
Avoid overdiversification. In case of stock investing, the individual investor should keep only as many positions as he is comfortable watching simultaneously. For example, how many 10-Q or 10-K forms can you read in a 3-month period?. In the beginning, an investor should have only 1 position. Gradually with time, the investor builds portfolio of investments up to the certain maximum number of investments. That number depends on the individual's abilities. Practically, the average individual investor should keep up to 60 positions: about 30-35 are very small, a "watch" type positions, and about 25-30 main positions, of which most funds focused in only 6-10 positions.
#5. Wait for the right pitch.
Don't buy any investment unless it's obvious that "this is the one". Keep money cash until opportunity shows itself. Like a hunter, who is using a rifle instead of a mashine gun, you have only several precious bullets while opportunities are countless. Wait for the right moment, then act quickly.
#6. Know the investment before investing.
Read and learn everything available about the investment. In case of stocks, read everything available about the business and industry including competitors, the company's operating and debt structure, learn about other major investors, activists, management and directors, and look for any possible conflicts of interests.
#7. Ignore what the others say, trust your own research.
Investment decisions based only on decisions of other investors is the primary cause of price bubbles. There would be no price bubble (maybe except in commodities) if all investors were acting rational. Trusting one's own research helps in emotion control during times of price depreciation and helps in making the right buy decisions when the investment price is low.
#8. Avoid the Experts
You should manage your own money yourself. No one is going to care about it as much as you. Trust no one. You've got to take responsibility for your own affairs.
#9. Learn to understand risk.
The risk is the product of the probability and impact of the possible event (R = P * I). Every investor should learn how to roughly evaluate probability and the impact (positive and negative) of all possible events. The risk can be calculated or at least evaluated unlike the uncertainty, which impact and probability cannot be measured. Understanding risk helps in focusing investment money in the investments with the highest expectation (E = Rp + Rn, Rp - risk of the event with positive impact, Rn - risk of the envent with negative impact).
#10. Learn from your mistakes
A human brain is not suitable for analysing past decisions. The best way is to keep a detailed summary of investment analysis in the written form for later review. Especially in stock investing, a very good habit is a routine of using checklists during analysis, periodical review of the investment, and debriefing after closing the position. In this aspect, being an investor is similar to being a student - rewarded are those, who do their homework.
#11. The learning process never ends.
Always improve and hone your investment knowledge and skills. There's no such thing as not enough experience.