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34 Investment Strategies and Rules to Make You a Better Investor
The most important attribute of successful investors is discipline in following a set of investment strategies and rules. In other words you don’t have to have a high IQ, a high education, extensive experience, or even great instinct.
You can be a successful investor by being disciplined in following a set of investment strategies and rules that guide you through bull and bear markets, times of greed and times of fear, and periods of high risk and periods of great opportunity.
The following investment strategies and rules are proven ideas to make you a better value investor and improve investment performance:
Investment Strategies and Rules
1. Patience is a virtue; develop and cultivate it in your investment management. Patience is a biblical principle that, if applied to investing, will greatly reduce your investment mistakes and improve your investment returns.
2. Only invest when the odds are heavily in your favor. (Patience)
3. Invest like an owner. Owners look at things differently. Most people care more about something they own versus something they rent. When you buy an investment think like a long term owner, not a renter.
4. Implement risk control strategies with diversification rules and don’t deviate from your parameters.
5. Understand the types of investment risk and try to avoid and mitigate them as much as you possibly can.
6. Concentrate on not losing money. It’s more important to not lose money, than make money. If you are preoccupied with making money you are apt to make bad decisions.
7. Know what kind of investor you are and the stock investing strategies that best fit your beliefs and personality.
8. Never invest money you might need because you will usually need it when you have to sell your investment at a low price.
9. There is a difference between saving, investing, and gambling . Know the difference and treat each one accordingly.
10. Don’t listen to financial prognosticators and forecasters. Understanding probability theory means focusing on the long term.
11. Only invest in what you understand. Good research leads to good investment decisions. If you don’t understand how and why a company makes money, don’t make the investment.
12. Minimize asset correlations by dividing assets among different asset categories. This is called asset allocation.
13. Never panic; but buy when others are fearful. This is when you will get the best price. When others panic, use some of your cash reserves to buy stocks at bargain prices.
14. Don’t time the market; you can’t pick the bottom or the top consistently. Learn how to make investment decisions based on value. Buy when values are good, and sell when values are high. This is something you learn over time.
15. Buy on corrections. Even raging bull markets have corrections which should be looked at as opportunities to buy something you wanted at a better price.
16. Sell when others are greedy. When the market is moving higher day after day, week after week; give them some of your stock. Your charity 😉 will usually be rewarded. No one ever goes broke taking a profit.
17. Avoid over diversification. Don’t own too many small positions or so many stocks that you become an index fund. This assures average performance and keeps you from owning only the very best opportunities.
18. Focus your portfolio on a few industries with strategic advantages and/or bargain valuations. Owning every industry is over diversification and keeps you from owning the best opportunities.
19. Focus on the medium to long term and de-emphasize the short-term. Where will your investments be 3 – 5 years from now?
20. Expect market volatility, but avoid portfolio volatility. Be prepared financially (cash reserves) and psychologically to buy more of the quality stocks in your portfolio when stock prices take a hit. Be prepared to sell your more expensive valuations when markets are frothy.
21. When researching dividend stocks, yield should be secondary to Dividend Coverage Ratios and Dividend Payout Ratios. These ratios provide insight into the safety and potential growth of a company’s dividend.
22. Look for companies with a moat. Companies with sustainable competitive advantages can dominate their industries. They have a high probability of surviving, and even thriving, in bad economic times. Companies that sell necessities have an advantage.
23. The Gross Profitability Ratio is a superior quantitative metric for finding companies with competitive advantages.
24. Cash Flow From Operations is a critically important company metric because it tells you how much cash a company is generating from core business operations. Look for companies with strong predictable cash flows.
25. Invest in companies with great management. Management controls the cash flow, or where the company’s capital is allocated.
26. Understand Enterprise Value because it represents the total value of a company’s equity shares. Essentially, this is what you would be paying if you were buying the whole company. Just because you are buying a fractional share, doesn’t mean you would treat your money differently.
27. Use Operating Earnings Yield to compare stocks. This is a profitability and valuation ratio. This metric tells you how much operating earnings the company is producing compared to the stock price.
28. The Piotroski F-Score is an easily accessible metric that combines nine tests in profitability, capital structure, and operating efficiency. It’s an easy approach to identify companies with good fundamentals and eliminate weak companies.
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29. Compare companies you’re considering for purchase to the best stocks in your portfolio. If they don’t measure up; don’t buy them. If the price is too high; wait. (Patience)
30. Only buy stocks that are priced with a Margin of Safety. Refuse to overpay. Many times that means passing on great companies, or at least waiting for a better value. (Patience)
31. Companies with great balance sheets have can withstand unforeseen problems or economic downturns that can harm leveraged companies. I have found that Net Financial Debt Ratios provide greater accuracy in identifying attractive companies than the more popular debt ratios that don’t account for cash balances.
32. After all these cautionary rules and strategies are taken to heart, realize there is NEVER a perfect time to invest. Uncertainty is a part of investing and that is why it’s important to invest with the odds in your favor.
33. Cash is an important asset category to protect your portfolio in bear markets, and provide capital to buy assets when they are at bargain values.
34. Work hard and do your homework. If you need help hire wise experts to help you.
These investment strategies and rules will make you a better value investor. You will reduce your number of mistakes and avoid many of the pitfalls that wreck investment portfolios. By concentrating on taking prudent risks that favor positive returns you boost your long term investment returns.
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