The Basic Principles of Investing
Updated: Dec 24, 2022
Ever since I read the book, 'Rich Dad Poor Dad', written by Robert Kiyosaki, back in 1999, I embarked on a lifelong path of real & practical financial education.
Over the past 2 decades, I went on to read multiple books on the subjects of money, finance, investing & trading.
Based on what I understood, I created some basic principles of investing for myself, which I decided never to violate.
I want to share some of those basic principles with you today.
They logically sound very simple, yet are psychologically not easy to apply.
When it comes to matters of money & investing, it is not a game of logic.
It is a game of psychology and probabilities.
Logic does have a small role to play here, but its the psychology that separates the winners from the losers in the financial markets.
1) I never put my money in bank fixed deposits
The reason is simple.
After adjusting for inflation, what we are left with, is a negative return.
Why would I invest in something that is destined to compound my money at a negative rate of return for years to come ?
2) To me, gold & silver is not an investment. It is an insurance
How many times have you received dividends from gold ?
Or silver for that matter ?
I wonder why people consider gold and silver as investments when it can't produce anything for us.
To me, gold & silver simply serves to maintain my purchasing power. Nothing more than that.
3) I only invest in assets that provide a cash flow
If I invest in a stock in the stock market, that pays me a 5% dividend on my money, that's cashflow for me.
Not only am I getting a return on my money, but I also retain the upside potential in the stock, provided I have invested in a good business.
When buying assets, I am not looking to buy the best asset in town.
I am looking to buy a reasonably priced asset in town.
The fact that it is an asset, implies that I am only investing in good businesses, which have demonstrated a capability to produce free cashflow.
4) I never invest in actively managed mutual funds
Why would I give my money to a fund manager to manage, when I know that over very long periods of time, the fund managers are most likely to have a difficult time, beating the market indices ?
Moreover, I feel the fund manager is most likely to be concerned about retaining his job, than to protect my best interests by only investing in companies that produce a free cash flow.
And by the way, those kinds of companies are very few in the stock market.
The stock market is nothing but a bunch of garbage companies with very few hidden gems in it, which are worth investing in.
Just because a company is called as a bluechip company does not mean that it is making money.
These days I see loss making companies in the stock market, announcing share buy-back offers, which in my view is absolutely ridiculous.
5) When in doubt, don't invest or trade
I have learnt this lesson the hard way.
Just before pulling the trigger, even if there is a hint of doubt in my mind about my next trade or my next investment, I force myself to stop.
I re-asses the opportunity and then make a rational decision.
A doubt in my mind is like a red-flag.
I rely to a certain degree on my intuition as well.
6) I avoid shiny objects
Whether it is cryptos, IPOs, NFOs, NFTs or any new investment fad, I am just not interested.
There is far more money to be made in century-old established businesses, than there is, in the next big investment opportunity.
To me the reward to risk with shiny objects just doesn't make any sense.
So those were some of the basic principles I have developed over the years for myself which I strictly follow.
It has helped me tremendously in staying away from financial catastrophes.
In the financial markets, for me it is not about making the best financial decisions.
It is more about avoiding stupid financial decisions.
Rohit Musale, CFA
13 December 2022