Sir John Templeton is known as one of the leading investment managers of the 20th century. A closer association you may recognise is Franklin Templeton, the money manager.
Templeton listed 16 Rules of Investment Success. Most of them will resonate with you even though you have heard or read them before.
Here they are:
#1 Invest for maximum Total Real Return
The real number that you have to worry about is what is left after taxes and inflation. The two can have a brutal affect on your returns. Even when your returns are enough to take care of the 2 devils, you just protect your purchasing power. Only when your returns go beyond them, do you create wealth.
#2 Invest – Don’t Trade or Speculate
The market is not a casino. But you may it turn into one with frequent buying, selling, using exotic investments, derivates, options, etc., which you may hardly understand and thus often lose money in.
Keep in mind the wise words of Lucien Hooper, a Wall Street legend: “What always impresses me,” he wrote, “is how much better the relaxed, long-term owners of stock do with their portfolios than the traders do with their switching of inventory. The relaxed investor is usually better informed and more understanding of essential values; he is more patient and less emotional; he pays smaller capital gains taxes; he does not incur unnecessary brokerage commissions; and he avoids behaving like Cassius by ‘thinking too much.’
#3 Remain Flexible and Open-minded about Types of Investment
There are times to buy blue chip stocks, cyclical stocks, corporate bonds, Treasury instruments, and so on. And there are times to sit on cash, because sometimes cash enables you to take advantage of investment opportunities. The fact is there is no one kind of investment that is always best. If a particular industry or type of security becomes popular with investors, that popularity will always prove temporary and—when lost—may not return for many years.
You have to choose your investments with careful research, study and analysis.
#4 Buy Low
Easy to say, difficult to do.
Heed the words of the great pioneer of stock analysis Benjamin Graham: “Buy when most people…including experts…are pessimistic, and sell when they are actively optimistic.”
Bernard Baruch, advisor to presidents, was even more succinct: “Never follow the crowd.”
#5 When buying stocks, search for bargains among Quality Stocks
What is Quality?
Quality is a company strongly entrenched as the sales leader in a growing market. Quality is a company that’s the technological leader in a field that depends on technical innovation. Quality is a strong management team with a proven track record. Quality is a well-capitalized company that is among the first into a new market. Quality is a well known trusted brand for a high profit-margin consumer product.
How do you find quality in mutual funds? Read here.
#6 Buy Value, not market trends or economic outlook
The stock market and the economy are not always tuned in together. Ultimately, it is each of the stocks which form the market and not vice versa. You have to go after value of an individual stock than chase trends or outlooks.
No matter how careful you are, you cannot predict nor control the future.
You have to diversify to protect your investments from the unknown unknowns – risks that remain despite your best efforts to eliminate them. You need to diversify by risk, by industry and by country.
#8 Do you homework or hire wise experts to help you
You need study and analysis to zero down on the investments that suit you and are likely to work for you. Do your homework enough before you invest your money. If that is not possible, hire an expert to help you evaluate, analyse and build a framework for making investment decisions.
#9 Aggressively monitor your investments
While enough has been said about the need to be patient, a good investor tracks his/her portfolio on a regular basis (once a year, as an example).
Now that you have laid down your framework including an investment strategy and asset allocation, monitor it regularly and make required changes, as and when required.
This will enable you to keep your portfolio healthy and weed-free.
#10 Don’t Panic
When you act out of panic, you undo some of your best efforts. If you sell your investments just because of a temporary decline, you end up making the loss permanent. As a result, you may put yourself back financially by months and/or years.
You may also continue to stay with a losing investment, a result of a wrong decision as it continues to wreak havoc on your portfolio.
In investing, patience is a virtue. Thinking with a clear mind will save you all the pain. A clear mind can only be a result of an investing framework tested over time.
#11 Learn from your mistakes
That is the biggest trait of successful people and successful investors too. You may lose the money, but never lose the lesson.
If you want to altogether avoid mistakes in investing, the only way is to avoid investing, which can be the biggest mistake by itself.
#12 Begin with a Prayer
Whatever be your method. A prayer allows you to focus, cut the noise and think clearly.
#13 Outperforming the market is a difficult task
He said that for the US. However, in India too, most investors find it extremely difficult to do that. The reasons are not too far to seek. We only want to buy when others are buying. We want to identify with the crowd.
#14 An investor who has all the answers doesn’t even understand all the questions
This is a hard hitting one. You can never be sure of what you know and what you don’t know. Keep your humility intact and remember that there is a far greater force out there.
#15 There’s no Free Lunch
You may want to invest based on a free TIP you received. But do you ask why did the person with the tip passed it on to you? Why did he not use it all for himself?
Are you getting free advice? Why is it free? Think. Ask.
You may be saving the money but what you may be giving away can be far more precious.
#16 Do not be fearful or negative too often
There will always be ups & downs, wars, calamities and disease. Governments will change. However, that has been norm in the past too. We survived and we continue to move on. Hopefully, it will remain true for the future as well.
Be cautious, but not fearful.