An ABC of investing

There are Biblical commandments that were provided to act as a driver’s manual for the road of life.

“Thou shalt not kill.” “Thou shalt not bear false witness.” These are life’s versions of the stop-at-the-redlight- and-advance-when-safe rules of the road. In reality these are all guidelines to keep us out of trouble.

If you think of it, life’s highways are full of potholes, blind turns and bad drivers, so too is the investing world which experiences scandals, scams and dishonest companies. There are several rules for the investing world designed to help keep investors – and their money – safe.

The first rule to become a successful investor is that you must ensure that your personal finances are sound. Investing when you have high-interest debt is not advisable. If your debt means you can’t meet your payments, take care of those more serious problems before getting too deep into investing.

Second, always have a purpose or a set of clear goals to guide your investment strategy. If you do not have this, hold on investing until you are clear about why you want to invest. This will allow you to determine the best approach, investments vehicles and risk to accept in your strategy.

Third, the lesson from Hindu Credit Union (HCU) and CL Financial is to never put all your eggs in one basket. Do not invest all your funds in one company. “Diversify, diversify, diversify” has to be the mantra of your investment strategy; this will mitigate the loss accruing from the failure of an institution that holds all your investment funds.

Fourth, proper investing requires asking and answering the right questions; these determine what you should buy and sell. CEOs, CFOs and all the other acronyms that we use to classify the so-called professional financial caste can’t hide the fact that they are human, and that humans sometimes lie, deceive, connive and mislead. Again, the CL Financial and HCU inquiry taught us that lesson. In fact, analysts get kickbacks, CEOs get stock options and recent accounting and rating scandals show that impartial accounting and rating are not guaranteed.

As an investor, you must question authority; it is your money, you will need to educate yourself, especially on the subject of financial statements and accounts. Press releases are pieces of a puzzle that by themselves hide much from the investors, but financials provide a much bigger part of the picture. Although financials can be tampered with, there is always a trail left behind. If there are people who have been associated with failed companies, investors need to be careful before investing their money in companies in which they are directors.

Fifth, do not adopt the herd mentality. There is a lot of available information for investors – much of which is true – but accepting it with an uncritical eye and neglecting to check it yourselves is what leads to herding by unscrupulous financial advisors who push “investment products” such as annuities. If you are going to invest, you have to check the firms for yourself. This takes more time, but it will tell you when to stay out and not follow the herd.

Sixth, investors should not allow themselves to become overconfident.

Overconfidence often leads to overtrading, taking unnecessary risks and eventual losses. We all must remember if something is too good to be true it probably true. You need to pay attention to the details contained within the investment policy document.

Seventh, investors need to realize that patience is a virtue for a good reason: It pays for itself. If the market were to dip, or even when a particular stock dips, there will always be investors who panic and sell. However, investors need to treat selling as seriously as buying.

Investors need to assess if the present circumstances are not serious and just a temporary phenomenon, then they should simply ride it out.

Eight, never mimic an investing strategy that you do not fully understand. A strategy works for a certain period. Once it becomes widespread, it skews the system.

Remember there is no perfect investor. Warren Buffett, George Soros and Peter Lynch have all slipped up from time to time. Skepticism will help you to survive as an investor much longer than believers or followers would. Remember to determine the appropriate level of risk for you as an investor given your age and risk appetite of course and your ability to handle losses.

Praying or driving on the road assumes that everyone else will follow the same rules you do and can be considered acts of faith. However, investing, requires practice. To be a good investor, doubt has to become a part of your existence and doublechecking a ritual.