I Suggest Reading One of These Every Day, Part II

I hope you enjoyed Part I of Peter Lynch’s “25 Golden Rules.”

He wrote the book in 1993. Yet the core values remain the same.

One of the most important “rules” from Part I is about the part-time stock picker only having enough time to follow 8-12 companies.

You need to understand this if you want to buy stocks.

Think of it like a CEO thinks about their number of direct reports. (You are the CEO of your own portfolio.)

In his book the Ultimate Sales Machine, business guru Chet Holmes said no one should have more than six direct reports. It makes sense if you think about it this way.

You become reactive when you have too many direct reports. You end up dealing with interruptions. Or putting out fires all day long.

Instead of focusing on growing the business.

A similar thing happens with the individual investor. If you follow too many companies or invest in too many companies, you’ll never have time to read all the earnings calls, news, 10k’s etc.

You don’t know if the company is following its growth plan or sliding off the tracks.

You become reactive instead of proactive. If the stock drops 10%, you panic. Now, you’re playing catch up trying to read all the news and reports.

Worse-case, the company news could be bad. Maybe it’s headed towards bankruptcy.

The bottom-line, keep a small watch list of companies you’d love to own. It’ll be easier to manage and take advantage of big opportunities in the market.

When they get cheap, then it’s time to buy. Don’t hold more than five in your portfolio at any one time.

You’ll never be able to keep up. (Don’t forget, buying stocks is part of a bigger asset allocation policy.)

Now, it’s time for the rest of the “25 Golden Rules.” Again, I suggest you read one every day.

  1. If you invest $1,000 in a stock, all you can lose is $1,000, but you stand to gain $10,000 or even $50,000 over time if you’re patient. The average person can concentrate on a few good companies, while the fund manager is forced to diversify. By owning too many stocks, you lose this advantage of concentration. It only takes a handful of big winners to make a lifetime of investing worthwhile.

 

  1. In every industry and every region of the country, the observant amateur can find great growth companies long before the professionals have discovered them.

 

  1. A stock-market decline is as routine as a January Blizzard in Colorado. If you’re prepared, it can’t hurt you. A decline is a great opportunity to pick up the bargains left behind by investors who are fleeing the storm in panic.

 

  1. Everyone has the brainpower to make money in stocks. Not everyone has the stomach. If you are susceptible to selling everything in a panic, you ought to avoid stocks and stock mutual funds altogether.

 

  1. There is always something to worry about. Avoid weekend thinking and ignore the latest dire predictions of the newscasters. Sell a stock because the company’s fundamentals deteriorate, not because the sky is falling.

 

  1. Nobody can predict interest rates, the future direction of the economy, or the stock market. Dismiss all such forecasts and concentrate on what’s actually happening to the companies in which you’ve invested.

 

  1. If you study 10 companies, you’ll find 1 for which the story is better than expected. If you study 50, you’ll find 5. There are always pleasant surprises to be found in the stock market – companies whose achievements are being overlooked on Wall St.

 

  1. If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.

 

  1. Time is on your side when you own shares of superior companies. You can afford to be patient – even if you missed Wal-Mart in the first five years, it was a great stock to own in the next five years. Time is against you when you own options.

 

  1. If you have the stomach for stocks, but neither the time nor the inclination to do the homework, invest in equity mutual funds. Here, it’s a good idea to diversify. You should own a few different kinds of funds, with managers who pursue different styles of investing: growth, value, small companies, large companies, etc. Investing in six of the same kind of fund is not diversification. The capital-gains tax penalizes investors who do too much switching from one mutual fund to another. If you’ve invested in one fund or several funds that have done well, don’t abandon them capriciously. Stick with them.

 

  1. Among the major stock markets of the world, the U.S. market ranks eighth in total return over the past decade. You can take advantage of the faster-growing economies by investing some portion of your assets in an overseas fund with a good record.

 

  1. In the long run, a portfolio of well-chosen stocks and/or equity mutual funds will always outperform a portfolio of bonds or a money-market account. In the long run, a portfolio of poorly chosen stocks won’t outperform the money left under the mattress.

The “25 Golden Rules” are powerful.

They’ll help you make good decisions. They’ll help you make more money. They’ll help you ignore the herd and the ups and downs of the stock market.

If you’re serious about being a better investor, then take the time to read one every day.