The greatest investors follow a number of different systems, but their underlying principles tend to be similar and surprisingly simple. Here is what you can learn from their advice:
1. "Buy when there's blood in the streets." -- Baron Rothschild
Everyone thinks they know this one. Almost no one actually follows it. When your portfolio is leaking like the Titanic, why would you want to buy more? Wait a few months, and you'll usually be able to see why. Another good way to gauge the time to buy is that it feels terrible. When you feel good about a stock purchase, double check your numbers. It's easy to feel good when things are going up and up, but the long term results are likely to be disappointing.
2. "Buy a company any idiot could run, because sooner or later any idiot will be running it." -- Peter Lynch
Businesses with little competition and high profit margins can be run by almost anyone. Those with lots of competition and low margins require management genius. Stick with the simple business. Not only is it likely to do better, but you'll find it easier to decide when to sell. "Never invest in anything you can't illustrate with a crayon," Lynch said. It's still terrific advice.
3. "You won't improve results by pulling out the flowers and watering the weeds." -- Peter Lynch
People tend to think that what goes up must come down, and vice versa. While there is a tendency for stock prices to revert to the mean, a good business will continue to outperform a poor one. Selling your winners and keeping your losers is a bad plan.
4. "The best time to sell a stock is never."-- Warren Buffett
Does this mean you should really never sell a stock? No, but it means you should buy a business you'd be happy to hold for the foreseeable future. When things change for the worse you should sell, but trading in and out of the market frequently is usually a loser's game--especially for small investors.
5. "One way to end up with one million is to start with two million and use technical analysis."-- Ralph Seger
The average investor has the attention span of a two-year-old. He or she wants a way to make money now, and panics the minute a stock goes down. If someone offers complicated charts and formulas that promise quick profits, the ears perk up. The more complicated the method, the more appealing it is. Enter the voodoo practitioners, in the form of technical analysts. Of course technical analysis works some of the time. Everything works some of the time. But if you want a sure fire way to long term riches, look at the fundamentals and forget the fancy charts.
6. "The four most dangerous words in investing are 'This time it's different.'" -- John Templeton
The tech wreck is a recent example of this lesson, which investors never seem to learn. If you're being told that the market will perform in a way it never has in recorded history, be extremely skeptical. If someone starts talking about a "new paradigm," take your money and run for the hills.
7. "If the world's economists were laid end to end, they would all point in different directions." -- Arthur Motley
Calling economics a science is like calling an astrologer a life planner. Economists can't predict what will happen next month or next year with any degree of reliability. The best thing you can do is forget trying to predict the economy and invest for the long term. The ever-witty Peter Lynch put it another way: "If all the economists in the world were laid end to end, it wouldn't be a bad thing."
8. "An effective zero percent interest rate for hiding in a foxhole is prohibitive." -- Bill Gross
When people get scared, they flee to bank accounts and T-bills, even when the rates are laughable. But unless you take risks with some of your money, you effectively lose money all of the time, due to the eroding effects of inflation-which never seems to get as low as the interest rate on your bank account. Only in a time of rapid deflation would you want to keep most of your money in cash.
9. "The person that turns over the most rocks wins the game."-- Peter Lynch
Look at two stocks, and you'll probably find two so-so buys. Look at twenty or thirty, and you're likely to find a couple that look extraordinarily good. Looking at lots of options is the secret of finding winners.
10. "In this business, if you're good you're going to be right six times out of ten." You're never going to be right nine times out of ten."-- Peter Lynch
Of course by "good" Lynch might have meant himself. You'd better make that four out of ten if you're not Peter Lynch. It doesn't matter. If you make four great picks, you'll still do just fine.
11. "A lot of great fortunes in the world have been made by owning a single wonderful business." -- Warren Buffet
When you know you have a great idea, place a sizeable bet and have some patience. Look at the twenty-year returns of some of the world's greatest businesses and you'll be astonished. Remember, though, that those companies are unlikely to repeat that performance because they've gotten too large to grow quickly. The key to finding big winners is to find little companies with big prospects.
You may have heard these before but, this time, take them to heart. Use these rules to invest until it becomes second nature. Hang in there, even if things don't go your way at first. In the short term, you may think you're crazy to follow some of this advice. But look at your returns in five years or ten, and you'll begin to understand how the rich get richer.
By Anthony Bae
Article Source: http://EzineArticles.com/6550005
1. "Buy when there's blood in the streets." -- Baron Rothschild
Everyone thinks they know this one. Almost no one actually follows it. When your portfolio is leaking like the Titanic, why would you want to buy more? Wait a few months, and you'll usually be able to see why. Another good way to gauge the time to buy is that it feels terrible. When you feel good about a stock purchase, double check your numbers. It's easy to feel good when things are going up and up, but the long term results are likely to be disappointing.
2. "Buy a company any idiot could run, because sooner or later any idiot will be running it." -- Peter Lynch
Businesses with little competition and high profit margins can be run by almost anyone. Those with lots of competition and low margins require management genius. Stick with the simple business. Not only is it likely to do better, but you'll find it easier to decide when to sell. "Never invest in anything you can't illustrate with a crayon," Lynch said. It's still terrific advice.
3. "You won't improve results by pulling out the flowers and watering the weeds." -- Peter Lynch
People tend to think that what goes up must come down, and vice versa. While there is a tendency for stock prices to revert to the mean, a good business will continue to outperform a poor one. Selling your winners and keeping your losers is a bad plan.
4. "The best time to sell a stock is never."-- Warren Buffett
Does this mean you should really never sell a stock? No, but it means you should buy a business you'd be happy to hold for the foreseeable future. When things change for the worse you should sell, but trading in and out of the market frequently is usually a loser's game--especially for small investors.
5. "One way to end up with one million is to start with two million and use technical analysis."-- Ralph Seger
The average investor has the attention span of a two-year-old. He or she wants a way to make money now, and panics the minute a stock goes down. If someone offers complicated charts and formulas that promise quick profits, the ears perk up. The more complicated the method, the more appealing it is. Enter the voodoo practitioners, in the form of technical analysts. Of course technical analysis works some of the time. Everything works some of the time. But if you want a sure fire way to long term riches, look at the fundamentals and forget the fancy charts.
6. "The four most dangerous words in investing are 'This time it's different.'" -- John Templeton
The tech wreck is a recent example of this lesson, which investors never seem to learn. If you're being told that the market will perform in a way it never has in recorded history, be extremely skeptical. If someone starts talking about a "new paradigm," take your money and run for the hills.
7. "If the world's economists were laid end to end, they would all point in different directions." -- Arthur Motley
Calling economics a science is like calling an astrologer a life planner. Economists can't predict what will happen next month or next year with any degree of reliability. The best thing you can do is forget trying to predict the economy and invest for the long term. The ever-witty Peter Lynch put it another way: "If all the economists in the world were laid end to end, it wouldn't be a bad thing."
8. "An effective zero percent interest rate for hiding in a foxhole is prohibitive." -- Bill Gross
When people get scared, they flee to bank accounts and T-bills, even when the rates are laughable. But unless you take risks with some of your money, you effectively lose money all of the time, due to the eroding effects of inflation-which never seems to get as low as the interest rate on your bank account. Only in a time of rapid deflation would you want to keep most of your money in cash.
9. "The person that turns over the most rocks wins the game."-- Peter Lynch
Look at two stocks, and you'll probably find two so-so buys. Look at twenty or thirty, and you're likely to find a couple that look extraordinarily good. Looking at lots of options is the secret of finding winners.
10. "In this business, if you're good you're going to be right six times out of ten." You're never going to be right nine times out of ten."-- Peter Lynch
Of course by "good" Lynch might have meant himself. You'd better make that four out of ten if you're not Peter Lynch. It doesn't matter. If you make four great picks, you'll still do just fine.
11. "A lot of great fortunes in the world have been made by owning a single wonderful business." -- Warren Buffet
When you know you have a great idea, place a sizeable bet and have some patience. Look at the twenty-year returns of some of the world's greatest businesses and you'll be astonished. Remember, though, that those companies are unlikely to repeat that performance because they've gotten too large to grow quickly. The key to finding big winners is to find little companies with big prospects.
You may have heard these before but, this time, take them to heart. Use these rules to invest until it becomes second nature. Hang in there, even if things don't go your way at first. In the short term, you may think you're crazy to follow some of this advice. But look at your returns in five years or ten, and you'll begin to understand how the rich get richer.
By Anthony Bae
Article Source: http://EzineArticles.com/6550005
