How to Invest Money Wisely: 5 Rules of Investing
Entrepreneur and writer passionate about technology
This guide will teach you how to invest your money wisely in 2020. Follow this five simple rules of investing, and you’ll be safe.
1) Know the Business / Find your Passion
Warren Buffet always says that when investing he sticks to his “circle of competence”. He knows Coca-Cola, Gillette and Geico, but computers are a mystery to him, so he doesn’t like to invest in that area. This is why the first rule to successful investing is to know the industry you’re investing in
, as well as the people in it. For example, if you know about web development, then invest in websites; if you’re an art expert, invest in art… and so on.
The main reason for this rule is to decrease the chances of failure and to avoid the trend follower’s mentality. The pit of losers is filled with trend followers and speculators and we’re not speculating, we’re investing!
2) Don’t Leap, Creep Forward
Speculators take higher risks for some low rewards and usually, due to the nature of statistics and chances, lose most of their investments. Speculators love to chase trends and illusions, and when you chase something and want to be ahead of others, you need to be really fast, or at least start the chase before others – and that’s like predicting the future.
don’t predict the future, they just buy and hold. This separates you from speculators. You need to be patient
and let the investment time to pay off.
3) No Sucking Thumb
As I said, we can not predict the future. This is why we spend our money (time and energy) and we wait for the payoff. If you can handle the risk and have a nice reward, then you shouldn’t hesitate to “pull the trigger.” Also, be a person of action and not the one that sits on his or her hands waiting for things to happen. You acquire adequate knowledge, test your judgment multiple times and carry out with the decision.
4) Invest in Value
Be a value investor and not a price investor; to invest money wisely, focus on the real value of that product and not on the price tag. I don’t know if you heard about this concept, but there is a value of a product that’s almost always different than the current price.
Price – how much money you pay for it (a price tag)
Value – how much (money) you can get/save/lose after some time
You should also separate investments from luxury – investments have high value and low price, but luxury has a high price and low value. Let’s talk examples when investing in a:
- New car – high price but low value => luxury (unless you drive for a living).
- House/apartment (for renting) – high price and okay value => investment, but maybe not a good one.
- New business – with low prices and high returns over time => investment.
So the rule here is to search for products that are low priced, but high in potential value, as well as to spend more on investments instead of luxury until you can really afford luxury.
5) Use the Margin of Safety
You don’t drive a 9 900 pound truck across a bridge that says "limit 10 000 pounds". Instead, you go further down the road and drive across a bridge that says "limit 20 000 pounds. That's the famous lesson on margin of safety.
The concept is simple: your goal is to decrease the risk and increase the reward as much as you can. I use the rule, “one to two,” where if I risk $1.00 I make sure I’ll get around $2 afterward. This way you need less than 50% of successful investments in order to be profitable.
Read, read, read… is the only way to get ahead. And, of course, follow the five rules of investing above to be safe.
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