The Golden Investor is an independent, experienced investor. A big misunderstanding is the thought of making a lot of money with investing. An investors’ main goal should not be exponentially grow their wealth, but maintaining their level of wealth and keeping control over the value of their assets.
Why does The Golden Investor invest?
By only holding cash your wealth decreases year by year and its value is affected by the monetary policy of central banks. With over a decade of quantitative easing it is time to review the fundamentals of the efficacy of this policy. The Golden Investor questions the way this policy is used and its long term, possibly disastrous, side-effects. Known side affects are increasing wealth inequality between stock holders and non-stock holders, e.g. increasing the gap between wealthy people and poor people. By holding the interest rate artificially low central banks create housing and stock market bubbles with its known dangers. This is the reason The Golden Investor has an alternative more risk-averse investment portfolio. The Golden Investor uses 8 basic rules when investing.
Golden Rule 1: Create A Diversified Portfolio
This is the most commonly known rule for investing and is essential for risk reduction. A more diverse portfolio with a broad spectrum of stocks holds less risk of loss and is less volatile. Risk of volatility is a much overlooked characteristic by investors, less volatility means more liquidity of your assets and does not affect the average yield e.g. gains on the long run.
Golden Rule 2: Keep Your Portfolio Well-Balanced
An investor should always hold a balanced portfolio, one could easily put more weight into certain sectors of preference. However this comes with a greater risk and exposure to the vulnerabilities of these sectors. If a certain type of security soars or makes a good run don’t forget to redistribute the gains to other securities. A portfolio which is out of balance holds extra risk of volatility as described in Golden Rule 1.
Golden Rule 3: Hold A Part Of Your Assets In Commodities
It is very advisable to hold a part of your assets in commodities with safe-haven characteristics like gold and silver. Gold and silver prices tend to soar in recession due to the safe-haven characteristics these materials hold. If stocks plunge, gold rises, and gold miner stock grows exponentially. An alternative non-safe-haven, material to hold is copper. There seems to come a great shortage of this material in the near future because of increasing world demand due to the rising use of electronics. Prices of this material could soar in the coming years if the material becomes scarce. A way to hold commodities and materials is to hold miner stock. Big miner stock tends to be less volatile and even if there’s no crisis, big miners are likely to pay small dividends.
Golden Rule 4: Don’t Trade Too Much
The biggest costs for small investors are transaction costs. Do research on what broker is the right one for you and your budget. Even more important is to find out what kind of investor you are, more active traders can afford to actively trade and react to short term events. The most important factor in trading is assurance, put your money in securities from which you believe these hold the greatest potential and stick with it. Traders tend to make impulsive trades which on the long run can be more costly than just sticking with your original well overthought investing decisions.
Golden Rule 5: Put Your Money In Viable Companies
Many new investors tend to thing putting their money in small cap companies is going to make them a lot of money, the opposite is true. Yes, indeed sometimes small cap companies are able to grow their business and see their stock prices skyrocket. However many small companies go out of business without anyone noticing. Don’t get it wrong, it is perfectly fine to invest in small companies, but this comes with greater risk and tends to be less profitable than investing in bigger more viable companies. One way to quickly scan a firm’s viability is to look at the balance sheet. Every stock listed company in America needs to publish a quarterly report every three months, these are public reports and can be found on the SEC website:
Take a look at the most recent 10-Q quarterly and 10-K annual reports and look at some key figures: Look at the current ratio: the current assets vs. the current liabilities, in this way you can see if a company is able to pay off its bills on the short term. You can see if a company is running out of cash and needs a new financing round which could dilute the share price. You can compare how revenue growth is in compare to previous years and compare it with other companies in the same sector. Basic accounting skills can give you a huge advantage in evaluating the value of a certain company.
Golden Rule 6: Assess The Future Value Of A Security
The difference in future value of a stock paying 4 percent dividend over a stock paying 5 percent dividend over a time period of ten years results in a difference of 14 percent in total. Take this in consideration when trading in stocks, small variations in dividend payouts can result in big differences on the long term. Try to determine the potential growth of stock and its profitability on the long run. Trading on short term blow-ups can be profitable too, but is far more based on speculation and to a certain extent also luck. Whereas bigger high dividend paying companies tend to be too big to fail and less exposed to changes in business cycles. Again, create a balanced portfolio with the right amount of risk to ensure long term gains.
Golden Rule 7: Be Aware Of Confirmation Bias
The biggest delusion among investors is confirmation bias. Confirmation bias of investors basically means investors only hear the things they want to hear and filter out all the criticizers. It is of great importance to always stay critical on what you hear, see or read and stay open for criticism even if you don’t immediately agree. Discussion is beneficial for both parties in order to evaluate the pro’s and con’s of certain stocks. But again, don’t take everything for a truth as many so called analysts and pro-traders probably don’t know much more than you know as long as you do your research right.
Golden Rule 8: Only Trade With The Money You Can Afford To Lose
Although a very obvious one, it is very human to get too much confidence. And in combination with confirmation bias this is a dangerous cocktail, always keep your head up, a good investor isn’t dependent on luck but on the accuracy of his own fundamental analysis.
Bonus Rule: Read The Golden Investor!
By reading The Golden Investor you get a much better understanding of how stock analysis should be done and where to look at. With multi-year experience The Golden Investor has great precedents and knows what he is doing. By reading The Golden Investor you stay ahead of the hypes and will get a broad view and insights on several investment opportunities. Besides all that, the critical view of The Golden Investor enables a new way of reporting and gives room for alternative views on political discussions and global developments.
There has been no great wisdom without an element of madness
The Golden Investor