For a long time now I’ve considered myself as an ‘investor.’ There are some golden rules of investing that everyone can follow.

Investing in yourself and others is obviously really important, but I’m referring to the act of investing in assets with the hope of having more assets in the future.

It’s easy to get caught up in ‘investing.’

It’s something we all know we should do, and there are many tools that exist to help us do it more effectively. If we’ve done anything over the past 10 years, chances are that we look like we know what we’re doing. Be it in the stock market, your buddy’s start-up, loaning money to your cousin… Money has been flowing freely over the past ten years and many investments have done well.

Investment opportunities seem to come out of the woodworks, and it’s important to have rules in place that influence your future decisions. These rules will help you make less severe mistakes, and those that you do make (hey, we all do), you end up learning something from and hopefully avoiding again in the future.

Even though Warren doesn’t agree with diversification, I like him. How can you not? Without a doubt one of the most successful investors of all time.

Here are his rules:

“Rule No. 1: Never lose money. Rule No. 2: Never forget rule No.1” – Warren Buffett

Pretty easy, right? Here are some other rules I’ve found helpful thus far:

My Rules Prior to Investing Anything

1. Don’t invest unless you know your “WHY”

Before making any investment, have a clear goal or objective. There are a lot of different reasons to invest, and many different investment options for those reasons.

Your WHY will dictate what sort of investments make sense for YOU – if you’re seeking capital appreciation in your portfolio, you won’t be very happy with buying rental real estate for stable cash flow (hopefully it’ll surprise you with some capital appreciation too ;)).

There are some other more obscure reasons to invest as well, for example:

Status/affiliation

Asset Protection

Financial/Systemic Risk Hedge

Geography/Economy Risk Hedge

Tax Optimization

Estate Planning

Investing for citizenship in another country

Once you have your goal, to accomplish it will require careful planning and execution – same with any sort of goal. Tough to have an effective plan without a clear idea of the goal. Knowing about the golden rules of investing, it will help.

Another added benefit of having a clear goal is that the day-to-day fluctuations get less important. You know your goal, stay the course.

2. Make sure you understand the investment.

Understand the investment. I cannot stress this enough as there are more and more esoteric investment options that emerge.

“Beware the investment activity that produces applause; the great moves are usually greeted by yawns.” Warren Buffett

Boring (easily explainable) investments often make the best investments.

Remember that the stocks you’re purchasing are actually shares of a real, operating company (well, should be at least). If you’re going to invest in individual stocks in the stock market, you should buy a single share as if you’re buying the entire business. How much debt does the company have? How does it operate? What happens if the circumstances change (e.g. interest rates go up)?

3. Make sure you have carefully considered all of the possible risks (regardless of the potential reward)

It’s easy to get caught up in the potential rewards offered by investments. So much that sometimes that’s all we’ll focus on and not be able to fully consider all the possible (real) risks associated with the investment.

Yes, sometimes it’s worth taking huge risks even if there’s a good chance you’ll lose everything. But, you know need to know that up front. How much of your total investment portfolio is allocated to these sorts of ‘high risk/ high reward’ investments?

Startups are a great example. Despite an overwhelmingly high chance of failure, but there are many (survivorship bias) startups (e.g. Google, Facebook, Uber) that are all 100x (or many more) above their initial investment amounts. That sort of return is certainly worth the risk.

But the headlines don’t show the other >99% of early-stage startups that fail, meaning a return of -100%.

Understand the risks, and make sure the reward properly reflects the amount of risk you are taking with your investment.

4. Understand or know the people in control of what you’re investing in.

This may seem less relevant for bigger more popular investments, and has some overlap with rule #2 of understanding your investment.

Either way, most ‘investments’ are ‘managed’ by someone. E.g. Tim Cook is the CEO and with the help of the board of directors helps manage Apple. Do these people have a track record of success?

Investing in early-stage startups is extremely risky. Their ‘great idea’ is likely to fail. So you’re investing in the team in the hopes that they can pivot or adapt quickly enough to find something that does work.

5. Know the value of what you’re buying, and try not to overpay for it.

A core principle of value investing, easy in theory but very difficult in real life. If you’re the buyer, there is an equally motivated seller on the other side that has his own reasons for selling that asset (which might include thinking that it’s currently overvalued). Understand the investment, understand what sort of value it has.

“Price is what you pay. Value is what you get.” Warren Buffett

This will help you ‘stay the course’ and not be distracted by short-term swings in price, instead allowing you to focus on the underlying value of your investment (which sometimes involves paying for growth).

Conclusion

Investing is not easy. It’s not supposed to be. But by following a few rules you can increase your likelihood of success in this investing game.

And in case you missed it…

Make sure you’ve also caught the blog about Investing in Real Estate: What are the options?

Interested in Cryptocurrencies? Have you seen our Free eBook? Intro to Investing in Digital Assets and Blockchain Technology: Banking on the Future

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