4 Important Investing Rules

Michael Comeau over at Minyanville.com put out a must-read list of four investment rules that should be taught in schools. From my own personal experience, I learned very little of what I actually use in my day-to-day job as an investment analyst from the four years I spent at Purdue University, much less the years spent in secondary education. The disconnect between the academic world and the real-world is vast, and to be successful in this industry you must work hard and to some extent self-educate.

Here are the four real-time investment rules Comeau wishes he had learned in school:

1. What You Know, Everyone Else Probably Knows, Too.

Investors have a tendency to overestimate the uniqueness of their ideas, even though they are usually inspired by widely disseminated news and financial reports.

2. Timing Is Everything.

A lot of folks were short Netflix  last year as it crashed and burned from that $304.79 high hit on July 13, 2011. However, many a bear’s butt was fried on the 73% rally the stock staged before it finally died out.

So when you have an investment thesis in your mind, ask yourself, “What makes now the right time to bet on this?”

3. You May Be Suffering From Confirmation Bias.

Translated into financial terms, it means that if you’re bullish on gold, you interpret everything you see as bullish for gold. In fact, you’ll hunt around for more reasons to be bullish for gold.
However, you can stay one step ahead of your own bias by regularly asking the question, “Am I just telling myself what I want to hear?”
4. In Isolation, Valuation Ratios Are Useless.

Far too often, investors take an incredibly simplistic view of valuation ratios, automatically assuming that if something is “cheap,” it’s good, and if it’s “expensive,” it’s bad.

However, oftentimes you’ll see the cheap get cheaper and the expensive get more expensive.

This is just a snippet of what Michael wrote, the entire article is well worth the read and should probably be bookmarked so you can remind yourself of these rules every few months.

Source: Four Real-World Investing Rules That Should Be Taught in Schools (Minyanville)

 
Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+.

About Andrew Thrasher

Andrew Thrasher is a Portfolio Manager for an asset management firm in Central Indiana. He specializes and writes about technical analysis as well as macro economic developments.