Trying to start investing can be daunting, especially if no one you know has any experience. This was true for me. With no one to turn to, I poured over as many books, blogs, and videos as I could to work out what to do
These are some of the key rules that I learned and that have helped me on my journey.
Rule 1: don’t lose money
Warren Buffett famously said, “Rule one of investing: don’t lose money. Rule two: follow Rule one”. While the quote is humorous on the surface, it’s worth bearing in mind whenever making an investment decision. Sure, investing is about building wealth, but we can’t do that by throwing cash away on thoughtless ventures. The first thing I learned was that I could lose everything if I wasn’t careful. So, I needed to think a lot before making any decisions.
Rule 2: understand the business
How can I be sure if I’m making a good investment? By knowing what I’m talking about. So, when considering a stock, I ask myself:
- What does this company do?
- How much does it cost to run?
- How much debt does it have?
- What’s its year-on-year revenue growth?
- Does the company have brand recognition and a stable history of profitability?
- Does the company have a new product coming out, or a continuing service?
All this information is easily available with a few good Internet searches. Some of it can be tough to grasp at first, but with time and focus it can be understood. There is no way to know if stock will do well in the future. But if I understand the business then I can have assess how well the company can weather any financial storms.
Rule 3: be patient
When I decided I wanted to become an investor, I saw the gains being made by some stocks and felt like I needed to invest as soon as possible. I didn’t do my research and bought Tesla shares because of how much they were going up. Then, when the price came down, I panicked and sold. I needed the patience to learn what I was investing in.
Conversely, if I had held on to those shares, I would have made a profit by now. I also needed the patience to wait for investments to bear fruit.
Rule 4: invest in myself first
The vast majority of people will not become rich just from investing. And that’s okay. Investing is about compounding wealth over time, not becoming a millionaire overnight. Once I realised this, I stopped worrying about how much a stock would go up in a day, and turned my attention to my career. Now I focus on earning enough to invest, instead of how much I can earn from investing.
Conclusion
Investing is a risky business that requires time, patience, careful planning, and as much help as one can get. The whole process definitely felt daunting from the outside, but I learned that it could be understood and used to my advantage.
No one can predict the future. A stock might go up, down, or nowhere, or a global pandemic could crash the market. What I can do is follow some simple rules to keep a clear head and stack the deck in my favour.
James Reynolds has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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