1. Thou shall not attempt to Time the Market.
Market Timing – Don’t try to guess it. To the little investor, market
timing is like a random walk (that is, every movement, up or down, of
the market almost every minute of every day, is like a unpredictable/
chance event). Most people only recognize the correct direction after
it is too late to take advantage of it. One exception to this is
“Bottom Feeding” —an approach to buying stock which you want in your
portfolio and place an open order to purchase you selected stock below
the current price. Thus, you wait until the market takes a down-turn
before it is purchased (the old buy-low sell- high philosophy), the
down-side of this is that you may never get into the stock you wanted
at the low ball price. –see Commandment 6
2. Thou shall not attempt to Out-Guess the Market.
Market Psychology – Don’t try to guess it. What catches the
imagination of the market is ephemeral (short-lived), what is IN one
day, one month, one year, is OUT the next. Most people only recognize
the market psychology after it has become apparent to almost everyone
else, and is too late to act on. For example, if investment in
Technology appears to be in vogue today, you may be too late to take
advantage of the trend. Thus, in this instance, one should only invest
in technology as part of a long-term balanced approach. –see
Commandment 7
3. Thou shall stay in the Market for the Long Haul.
Do invest for the long haul. Almost all scholars of the market, and
studies of the market show that stock investing should be part of a
long-term strategy, lasting 5-10-15, even 20 years or longer. Beware
that not every year will result in a positive return on your
investment, however over time, the Plus years will most likely out-
number the negative years considerably. One of the oldest most
successful brokers in the market who at the age of 90+ was asked
whether he was still in the market, answered “I am in for the long
haul”, this was also the advice of Merrill the founder of Merrill-
Lynch, the person who predicted the 1929 crash.
This commandment helps you observe commandment #1
4. Thou shall not act on Brokers who Advise moving in and out of the
market, and avoid Tips.
Brokers advice, if not based on sound long-term principles (such as
value investing) don’t take. Think about it! many brokers make their
living on having their clients constantly move in and out of
positions, thus garnering commissions. This is diametrically opposed
to Commandments 1, 2, 3. If they knew what they were doing they would
be doing it for themselves and not wasting their time holding their
clients hands. For such Brokers, their advise is likely to be as good
as monkeys throwing darts at stock listings on a wall. Only accept
advice if the person has your financial interest as their first
priority, and is not making a living on selling, i.e. commissions. And
of course never buy from someone who calls you.
Tips – don’t take tips, most are likely to be as good as blind monkeys
throwing darts at stock listings on a wall –many won’t even hit the
wall.
Taking Tips is in violation of commandments 1,2,6,10.
5. Thou shall invest in Blue Chips.
Do invest in companies which are considered to be Blue Chips. This not
only includes the Dow Jones Industrial 30, but many others as well.
Only invest in established companies which have good track records.
Beware that not every Blue Chip will increase after you buy it, and
that even Blue Chips have their good months/years and bad months/
years, but over time, the PLUS periods will most likely out number the
NEGATIVE periods considerably. Also invest in companies which have a
good record of declaring dividends (and hopefully of increasing
dividends each year).
Several variations of this are to pick the “Dogs of the Dow” (first
list 5 or 10 of the Dow stocks with the highest dividends, and then
order them according to price starting with lowest price as number 1,
then purchase several of the highest ranked ones) you can do this
anytime and rotate your holdings yearly or just once and stay in for
the long hall.
This commandment will help you to observe commandment #4
6. Thou shall invest on a regular basis over time.
A corollary to this is that “Investing should never be done in a panic
or treated as an Emergency.” Purchasing your selected stocks or mutual
funds is best accomplished at a steady rate over time, so as to avoid
the ups and downs of the market. This method is also known as “Dollar
Cost Averaging” and it is one of the most stable approaches to
investing. You can accomplish this in several ways. You can purchase
small amounts of stock on a regular basis, however you must pay a
commission on each purchase. You can also purchase directly from the
company for many stocks, usually without commission, this is known as
DRIPS. DRIPS (stands for Dividend Reinvestment Programs, but also
apply to Direct Stock/mutual fund investment plans) – Do invest in
your selected stocks slowly and consistently over time. You can set up
automatic purchase programs via your bank. Once started, you should be
consistent and continue regardless whether the price goes up or down,
and do this as long as possible.
This commandment helps you to observe commandment #1
7. Thou shall diversify thy portfolio.
Do diversify your portfolio, both within your selected areas and
between them. For example, for stocks, don’t invest only in Technology
because it happens to be in vogue today, but consider other areas/
industries as well (See commandment 2). Divide your holdings between
stocks (Blue Chips/Mutuals), bonds, savings (CDs), and real estate.
Don’t place all your eggs in one basket, although younger investors
can be more aggressive, that is, be more invested in the Stock Market.
Never pay loads for mutual funds and minimize commissions on all other
investments.
8. Thou shall not invest in Options or on Margin
Options – Almost every knowledgeable financial advisor will tell you
the same thing, —-if you are lucky enough to win in options, and
continue to play options, it will eventually take it all back, and
more. Playing Options is in violation of commandments 1,2 and 3. Never
use margin to buy stocks or bonds, you should not invest in money you
don’t have.
9. Thou shall honor the power of time –i.e. compound interest/return.
Power of compound Interest – someone said that after the power of
nuclear energy, the greatest power in the universe is compound
interest. Just work it out yourself — If you invested $100,000 at 7%
compound interest for 30 years you would have over $700,000 from that
$100,000.
Differing tax on profit is both legal and one of the best ways to
compound your return on investment and thus increase your earning
leverage.
Invest to the maximum all Keoghs, IRAs and other deferred compensation
retirement plans. There is no better deal around. You invest and any
return on your money continues to be reinvested, including what you
would have paid taxes on.
Stocks for the long haul. If you don’t sell a stock, you will not have
to pay taxes on the gain (i.e., taxes are deferred). Thus, you
continue to get a return on money which you would have paid taxes on.
Thus, stocks can act like a KEOGH/IRA as long as you don’t sell them.
10. Thou shall not watch/listen to the Stock Market on a daily/weekly
basis
Do not listen or pay attention to the news, financial wizards, or the
daily, weekly movements of the stock market. Remember, invest as if
you intend to not look at anything for 2-3 years, —-although knowing
human nature —one is most likely to take frequent peaks. Remember
Commandments 1 & 4