Fundamental Principals of Investing


Making an investment because one of your friends has advocated it to you or deciding to invest after encountering some lucrative investment offer by yourself can become a critical mistake. It is not the road to wealth, but the road to failure.

 

Why is that and why amateur investors often do fall into that trap? This happens because beginner investors  often consider investing to be a pretty simple and straightforward process and as a result they neglect the basics of investing.

Before making any investment, you should learn and understand fundamental investing principals. Those fundamentals will help you to protect your money and increase your profits.

1. Diversification

This is probably one of the most important points you have to look at, when you consider how to start investing. Despite how appealing can be the asset you want to invest in, do not invest all the money you have into just one asset. This should be done for safety of your money. Instead you will be doing much better if you select few assets and diversify your money between them.

2. Holding cash

While making other investments it is important to always have some cash available. Why it is important to always hold some amount of cash? Because of market constant volatility and fluctuations there is a good chance, that an opportunity will suddenly rise. And that is where value investing comes in. Imagine that you discover, that stock price of a company, which has a good business model and fundamentals is far below the value it should be. It means that company’s stocks are undervalued and therefore will rise in future. With that in mind you need to act fast and buy those stocks, while they are still cheap. And cash you have successfully saved will help you to do that.

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3. Research

Before making any investment despite how safe it is – you will do much better if you make research first. Why it is important and how to start investing based on a research? Let’s have a look at an example.

For instance you have decided to put some of your money into a bank savings account, while this investment is safe by its nature, if the bank you want to invest is bankrupt, it won’t be a safe investment anymore. Or you want to invest into a stock market and see in a performance chart of the stock you want to buy, that it is undervalued and it is best time to buy it, while in reality it is not undervalued, it is the company you want to invest is on its way to bankruptcy. Always pay attention to others sources of information, not to the media, because when information is being widespread by the media – it could be too late.

4. Consider Fees

To calculate your future profits more precisely and decide whether investment is worth it or not, you should take into account fees. Despite which investment you will choose there always be fees out there. You may ask what fees? Well, when buying or selling stock – you pay some percentage to broker, bank also has maintenance fees etc.

5.Taxes

Taxes always was a complicated issue. Taxation laws are different in each country, but it is very important to find out these laws, before you start any investment. Ideally you want to make investment planning with tax advisor. It will be hard to find out all the nuances without tax advisor. But when you just begin to learn how to start investing or can’t afford tax advisor service, it will be enough to find out what tax is implemented for investments in your country.

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Comments

  1. I like what you guys are up to. Very smart work.

  2. Hey dude! I quite agree with your thoughts.

  3. Investing definitely should NOT be like gambling, but some people treat it that way. It’s good to be informed instead!

  4. You need to know that it is the best opportunity for girowng your wealth as it allows you to invest in a wide selection of businesses in amounts that represent a reasonable risk to you and benefit from the company with relatively little effort on your part. It would behoove you to read as many investment books as possible to develop your own theories. There are essentially two aspects to investing, finding candidates for investment and proportioning the investments as per the probabilities and risks involved. Most people focus on the former and likewise many books focus on that with the most reliable being the value investing concepts put forth by Ben Graham and espoused by Warren Buffett and others. Essentially finding stocks that are priced below their proven value due to unfortunate but hopefully temporary circumstances.The second is often overlooked but is far more important as getting it wrong could turn good investments into bad investments, in general there are two camps, those who believe that it can be quantified and those that believe that only a relative ratio of reward to risk can be quantified and the rest is dependent on individual judgement. The argument between the two centers on defining the utility of wealth. Those that believe that a reasonable guideline can be derived quantitatively often use the log utility of wealth and the methods are often referred to as Geometric, Logarithmic or Kelly Criterion; it’s usually mathematicians, engineers and physicists that are in this camp from as far back as the 1700 s, these include Bernouli, Latane, and more recently Thorpe, Kelly, and Shannon. Those that say that only human judgement will suffice are usually economists such as Samuelson, Markowitz and Scholes. I would say that though it is only human judgement that suffices due to the utility of wealth being subjective, the log utility of wealth is a reasonable approximation and hence the geometric methods provide reasonable guidance from which to develop the human judgement needed.Most people approach this second problem by wide diversification which trades potential for growth for a reduction in non-systemic risk. As to how much diversification is sufficient, that’s the trick.Read a few books, ones I would recommend are The Intelligent Investor by Ben Graham, The Dhandro Investor by Mohnish Pabrai, and Fortune’s Formula by William Poundstone. In truth you need to read as many as you can bear and formulate your own opinion.There is one far more important aspect, that is to realize that it takes discipline, it will do you no good to spend a month learning about financing and then not using what you learn for ten years. You need to have the discipline to make it part of your daily life, you must divide your income into categories as soon as you receive your income. Traditional categories are Spend , Save , Donate and Invest . The Spend category is so that you never make a financial decision because you want the money to buy something. The Save category is that you never make a financial decision because you needed money due to some unforeseen emergency. The Donate category is so that you never make an investment decision because you felt you had to help someone or contribute to society.

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