Golden Dozen Investment Rules
Rule #1: Be patient.
Those who are content to grow rich slowly generally make out the best in the long run. There never was a successful investor who was not also possessed of unusual quantities of patience. Your objective should be to buy not for the quick trading profit, but rather to seek out stocks capable of doubling or even tripling in value through fundamental growth over a longer period.
Rule #2: Don’t be a chronic switcher.
This is the practice of many novices in the stock market. They are forever shifting from one stock to another, taking a small profit here and there. Any experienced individual will realize the futility of this. It can be very costly, not only in brokerage commissions and taxes but in missed opportunities. Often the stocks sold have not exhausted their upside possibilities, while the issues purchased have already had a substantial rise.
Rule #3: Don’t be too concerned with price moves.
Price changes are sometimes exciting. They can make you feel, temporarily, either very rich or very poor. But the real and lasting benefits are most likely to occur from dividends and from persistent growth of a company over the years. Look to the partnership benefits of business as opposed to trying to “trade for points.”
Rule #4: Have funds in vigorously growing companies.
Investments should be chosen primarily from the standpoint of whether they generate attractive total returns, that is, both appreciation and income. Underlying growth of the business should be reflected in the value of the stock and eventually the amount of the dividends paid. Liberal spending on the development of products and services is one good clue to a growth situation.
Rule #5: Look for real sleepers.
This requires many hours of study and investigative spadework, but it can pay off. There are often sleepers among the out-of-favor industry groups. If the price is way down and the public is scared and discouraged about a company, then you may have a real bargain.
Rule #6: Make sure the price is reasonable.
What you buy is important. What you pay for it is even more important. To gain perspective, look back over the range of highs and lows for several years. Compare the ratio of price to earnings with other stocks in the same industry and with the general market average. Observe the trend of revenue growth, earnings, the company’s debt situation and its cash position. Avoid the temptation to shoot from the hip. Compare values and prices as you would when buying a house or a car.
Rule #7: Don’t overreach for yields.
Stretching for high income is apt to provide only a short-run victory. All too often the higher-yielding securities reflect les attractive prospects, a poor general outlook for a company or too large a percentage of earnings paid out. Temptingly high yields are occasionally a warning of impending dividend cuts. Far better to buy where there is a prospect of a dividend increase. Then you will likely gain two ways – a higher income return and a higher price.
Rule #8: Be wary of low-priced stocks.
Some people feel happier with 1,000 shares of a $1 stock than with 10 shares of a $00 issue. But the price bracket is no indication of values whatsoever. Some $100 stocks are dirt cheap and well worth buying. On the other hand, BioCure Laboratories and Internet Webtronics at 10 cents a share may be very expensive indeed. It is the value and earning power behind each share that counts.
Rule #9: Be slow to average down.
If a stock is on the downgrade, there are probably good reasons. Give the situation time to simmer down and stabilize. In fact, it may be more profitable averaging up, that is, buying stock in a rising pattern. If the issue does well, buy more of it.
Rule #10: Don’t be too insistent on active leaders.
Often, better values can be found among some of the overlooked and less popular stocks. Most mutual funds and other large institutional buyers have to stick pretty much to the big names, but you as an individual are under no such obligation. You can shop for the best values and earning power per dollar, regardless.
Rule #11: Go over your portfolio periodically.
At least once a year, make it a point to sell a stock that has performed poorly. This process of continually weeding out deadwood will strengthen your portfolio. The tendency of many inexperienced investors is to sell stocks that do well and hold those showing losses, which is the same as eliminating your good performers and backing your previous mistakes.
Rule #12: Keep some powder dry even in a boom.
This will lessen your risk and act as a cushion or shock absorber. It will provide a source of buying power for bargain shopping later. However strong the stock market might be today, it doesn’t hurt to keep some cash handy for a turn in fortunes. Maintain some unused purchasing power as a hedge against the unexpected. This reduces the overall yield somewhat but is a form of insurance worth paying for.
Investors need a philosophy, or set of rules, to guide them. Here are the “Golden Dozen Investment Rules” as set forth by Richard L. Babson, Editor of the well-respected Standard & Poor’s Guide to Common Stock Investing, May 23, 2001.