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1. Keep it Simple. “There is nothing wrong with buying and holding stocks for the long term, as long as you buy the right companies and are patient. Those who trade too often, focus on irrelevant data points, or try to predict the unpredictable are likely to encounter some unpleasant surprises. This is also true of people who invest in things they do not understand”.
2. Have proper expectations. “Unless you are extremely lucky, chances are you will not double your money in the next year by investing in stocks. Such returns generally cannot be achieved over a short time period unless you take on a great deal of risk by, for instance, buying extensively on margin or taking a flier on a chancy security. At this point, you have crossed the line from investing into speculating.”
3. Be Prepared to Hold for a Long Time. “In the long run, the market is like a weighing machine–assessing the substance of a company. Be patient and keep your focus on a company’s fundamental performance. In time, the market will recognize and properly value the cash flows that your businesses create.”
4. Tune Out the Noise. “There are many media outlets competing for investors’ attention, and most center on relaying and justifying daily price movements of various markets. This means lots of prices–stock prices, oil prices, money prices, frozen orange juice prices–accompanied by lots of guesses about why prices changed. Unfortunately, the price changes rarely represent any real change in value.”
5. Behave Like an Owner. “This means reading and analyzing financial statements on a regular basis, weighing businesses’ competitive strengths, making predictions about future trends, as well as having conviction and not acting impulsively.”
6. Buy low, sell high. “If you let stock prices alone guide your buy and sell decisions, you’re letting the tail wag the dog. Hen stocks have fallen, they are cheaper, and that is generally the time to buy.”
7. Watch Where You Anchor. “Anchoring is a concept from the burgeoning field of behavioral finance that refers to our tendency to mentally cling to a specific reference point. Unfortunately, many people anchor on the price they paid for a stock and gauge their own (and their companies’) performance relative to this number.”
8. Remember that Business Economics Usually Trump Management Competence. “The most important thing is a company’s economic moat, not quality of management. Just think, you can be a great racecar driver, but if your car has only half the horsepower as the rest of the field, you are not going to win. In racing, the driver’s skill is important, but equipment quality trumps it.”