Never sell as a reaction to a drop
If you wake up one day, and see that your stock pick has dropped, and you feel that shaky panic building up inside you while your mind screams “Cut losses now!”, then you are unfortunately too late. Of course there are always exceptions to the rule, but assuming you give in and consistently sell when things get tough, you will most definitely shrink your portfolio value over time. I would prefer to hold a stock for a long time and know I still have the same number of shares as when I bought. This is especially true if its a small part of my portfolio and my original understanding of the company and its growth potential is still solid. Stocks have a way of surprising you more often than not.
Invest in what you know
I am living proof that investing in companies that you don’t understand will lead to ruin. During the 2008 financial crisis, I invested in Washington Mutual and held the bag to zero. During the oil price crash following, I also invested in SeaDrill Ltd and watch my position go to zero. I’m pretty sure there are other examples of my genius and mental fortitude. Bottom line, if you don’t understand why a company would grow to be more valuable in the future, you’re just an amateur gambler at the Golden Nugget.
No risk, no reward
Ok this is a really stupid, obvious rule. I’ll leave it here til I can articulate a better rule that I follow. If you can’t stand the thought of your stock positions diving and holding their breath at the bottom of the ocean, then you absolutely should not be investing. I should also add to this rule that you must accept your own ignorance as that goes hand in hand with risk. In my opinion, the lowest risk is a thoroughly diversified portfolio of indexes across sectors and markets (US, international), as well as allocations of private and public bond funds, REITs, commodities funds, cash, precious metals, and physical real estate. Then again, had I diversified like this, I don’t think my net worth would be close to what it is now.
Afterthought:
There is one more rule which isn’t really a rule, but a pattern you must try to get better at: Buy Low, Sell High. I’ve found that it takes a good amount of time before you can condition yourself mentally to do this consistently. It is very easy to tell how good you are at this, if you are actively trading a certain stock. Just look at the price chart over a period where you can plot your buys and sells.
Common sense disclaimer: This post is just a journal. It is not intended to be read by anyone other than for the purposes of entertainment. I am not in the financial services industry, so I am not qualified to give any advice related to investing. Assume I am just your neighbor standing on the curb with you holding a can of beer and shooting the shit.
One more afterthought: You will lose money. Every mistake you make will cost you money. How much is really up to you. Most people are way too optimistic about their abilities, and tend to invest too much, too fast. When I was in my twenties, I lost a few thousand dollars across several positions and it destroyed me to the point I gave up on investing for ten years. Had I been smarter, I would have diversified more, with much smaller positions. Back then, we didn’t have this craze of ETF’s and index funds. Mutual funds were available, but mutual funds are not appropriate for active investors. If I had spent only a few hundred per position instead of thousands, I may have learned better habits quicker in a more productive way. The biggest cost to me was the years where my money did not grow, although I did build my nestegg through real estate as well. That’s a whole other topic.