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Is it difficult to start investing?
I don't think so, although I think it can be difficult to do well. In some ways, experience can help, but there is only one way to gain experience!
Here are three rules that I follow now and that I also followed when I started investing. I believe they can help me improve my long-term performance in the market.
Rule One: Get close to the key issues and ignore everything else
With thousands of shares listed on the London and New York stock exchanges alone, it can seem difficult to know where to start investing.
But I think it makes sense to ignore most of those companies. My approach is to stick to specific investment themes.
They can take different forms, but are usually based in industrial areas. Like billionaire investor Warren Buffett, my goal is to stay within my “circle of competence.”
I feel like I understand the UK retail space, so I'm happy to weigh up the pros and cons of buying shares in Greggs either tesco.
However, cross-border payments between businesses in developing markets is an area I am less comfortable with. So I wouldn't consider buying shares in CAB Payments.
That doesn't mean I think it's an attractive or unattractive stock. I simply lack familiarity with their business space to feel comfortable deciding whether to invest my hard-earned money in their stock.
Rule Two: Think about the risk at least as much as the reward
People invest to try to get rich. Therefore, there is a cognitive bias: many of us tend to focus on the potential benefits of buying a stock while downplaying the (often very real) risks involved.
As Buffett says, the first rule of investing is not to lose money and the second rule is to never forget the first.
I think this underscores an important point. Losses can be almost inevitable from time to time. But serious investors take risk seriously.
Detecting why a company could do very well can be easy. Detecting why this might not be the case can be much more difficult.
Rule Three: Buy your number one investment idea, but buy others too!
This risk management approach also helps explain why I keep my portfolio diversified.
It's easy when you start investing to fall in love with a single stock. But even a great company can face difficulties, and even when it doesn't, a valuation that is too high can mean that a brilliant business becomes an unsatisfactory investment. Hence the need for diversification.
As an example, consider a share in Scientific Judges (LSE: JDG) which I sold earlier this year because I thought the share price was too high.
I think Judges is a great business. It has consistently increased its dividends annually in double-digit percentage terms, is highly profitable, and its niche of manufacturing scientific instruments for specialized users gives it significant pricing power.
But several of his businesses had what he called a “challenging”first half. In a trading update this month, the company said the flow of orders meant it might not even meet full-year sales expectations despite having already cut them in the summer.
Judges shares have risen 58% in five years, but have fallen 32% since May.
