The truth about investing is often hard to come by, so sometimes the simplest advice can be the most helpful. Here are ten investing axioms that remind us that investing doesn’t have to be that complicated.
Buy low, sell high
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It doesn’t take a rocket scientist to derive the concept of profit. Although this saying is as cliché as it is easy to understand, we often forget the central yet simple goal of investing in the stock market. Our goal is to end up with more money than we started with. Don’t let the methods overcomplicate the goal, especially at first. Use tools that allow you to keep this essential investing axiom in the forefront of your mind and let it guide your decisions.
Never try to catch a falling knife
Picking a stock’s bottom is a noble yet typically fruitless pursuit. When we see a stock price falling, our emotional response tends to scream BUY BUY BUY (kinda like that N-Sync song). In this case though, it’s typically ill-advised to follow your heart. Instead try taking the lump sum money you would have used to impulse buy at your predicted “bottom” and spread your buying out over time. You’re much more likely to make money this way, or at least, not bleed out completely from your knife wound.
Ride your winners, cut your losses
Perhaps the least natural axiom to put into practice, this market truth literally requires you to re-wire your brain. But don’t worry, you won’t need a doctor or electrician, just some good old-fashioned discipline. Logically, letting your profits grow and minimizing your losses makes sense because of simple arithmetic.
But emotionally, because of an instinctive cognitive bias termed ‘Loss Aversion,’ people tend to view losses disproportionately to gains. We would rather avoid a loss than realize a gain of equivalent size. However, if we spent our whole career avoiding losses rather than taking profits, we would never make any money. So cut losses short, and let profits ride!
The trend is your friend
Stocks tend to cycle in trends. If we can identify the direction a stock is going, or, when that direction is changing, we can stand to gain a lot. This central principle of technical analysis trading, has become increasingly popular as technology has inspired better data tracking and more effective analytical tools. On the stock market you can make money off of stocks whether the price is increasing or decreasing, so it doesn’t matter which direction the price is moving as long as you’re right. This is a big if, but regardless, use the trend to your advantage when you can, no matter what it is.
Be greedy when others are fearful and fearful when others are greedy
No list of stock market axioms could be complete without the tried and true words of Warren Buffet. In fact, it’s hard to pick just one of his famous insights! This particular quote is more than just a cute rhetorical device and reveals an essential concept of investing. Most of the time, moving with the herd is dangerous, and the true way to profit is choosing your own path or even going against popular opinion. Again, logically it makes sense, but when money is on the line stick to that logic and don’t let primal emotions takeover.
No one ever lost money taking a profit
Profits are profits no matter how small. Plus, the only way to guarantee you don’t lose money is to actualize those profits. This axiom sheds light on the odd way we treat money when its simply numbers on a screen or a page. If someone stuck out their hand out with a $5 bill in it you would take it right? Absolutely. But, a $5 gain on stock investments often doesn’t warrant selling that stock. Many people warn against selling a stock too early but, if you’ve made money, is it ever really too early?
The best stock to buy is the one you already own
With this axiom, investing mogul Peter Lynch combats the idea that you need to find the newest, trendiest, shiniest stocks to invest in. Hopefully, you’ve built a portfolio based on what you know best, and if what you know best is working than why not continue to drive that success? If you’re properly diversified and buying more of what you own doesn’t endanger having a balanced and well distributed portfolio, then stick with what works! Constantly speculating on new stocks is sure to lead to failure, so don’t succumb to the pressure.
Invest your surplus
Possibly the smartest advice you can take, investing only your surplus funds means never losing money you weren’t already willing or able to lose. As has been well established in this article, the psychology of trading often plays a bigger factor than logic or numbers. When you invest your surplus, you avoid the emotional influence of loss and your brain treats any gains as a “bonus.” So, all in all this tactic protects you from any detrimental amount of risk and is psychologically more rewarding.
Don’t try to time the market
Although we do want to buy low and sell high, it’s very difficult to pick the highest of highs and the lowest of lows. So don’t try to time the market. Instead invest in multiple increments over time, called dollar cost averaging, and take advantage of the daily and monthly movement of stock prices. This ideology decreases the pressure of having perfectly timed entrance and exit strategies and allows for a greater chance of profit over time.
It’s always a bull market (in the long term)
Last but not least remember that in the long term, the stock market grows. If the market wasn’t growing it wouldn’t be worth investing in, and if you spend a lifetime investing you will be able to absorb a few recession cycles. Use longevity to your advantage and never forget the big picture!