Some Important Principles of Investing

There are several important principles of investing that individuals should be aware of before investing their money.

These principles include:

• 80% of gains come in 20% of time. So an investor needs enormous patience and conviction to hold stocks or Mutual funds for 10 or 20 years.

• Why not all investors get rich? They like to get rich without going through many years of discipline and patience. Process leads to outcome.

• An inferior strategy you can stick with is likely to produce better results than a superior strategy you cannot stick with.

• Prices change frequently. Value change over a period of time. There lies the opportunity.

• Compounding is back loaded. It works well only over a longer period of time. There is no substitute for time in compounding.

• 99% of the time, doing nothing is the best thing to do in the market. It is good to be a Rip Van Winkle investor. Activity hurts. Sit still.

• You cannot predict or control markets. What you can control is how much you save, investment process and behaviour. Focus only on that.

• Random outcome doesn’t invalidate the need for a process. Sound process and consistently sticking to the same increases the chance of luck.

• Investors are human. That’s why markets would never be fully efficient.

• Markets usually run ahead or fall behind. Rarely in equilibrium. Over or under valuation can last for longtime. Don’t time the market.

• Buying and selling is easy. It is holding on through ups and downs is difficult, but ultimately most rewarding.

• Shelby Davis started investing only at age 38 with $50,000. Died at age 85 with $900 million. 23.2% annual return for nearly 5 decades.

• Shelby Davis is considered the second greatest (5 decades of successful investing is very rare) stock investor after Warren Buffett.

• Shelby Davis story shows starting late is not a big liability, provided you live long.

• Tiny drops of water make the mighty ocean. Invest regularly. Invest for the long term. You can create huge wealth.

• Not investing in equity is more risky than investing in it. Remember, you need to beat the inflation and retain your purchasing power.

• We see past bear markets as missed opportunities. However, thinking about future bear markets is gut wrenching. Strange investor psyche.

• If someone keeps reviewing the value of his house every day, we may suspect his mental health. But that’s what we keep doing with our equities.

• Equity investments are subject to behaviour risks.

Always keep a check on our emotions while investing.

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