Wednesday, March 15, 2006

Liberation by Following the Rules?

There can be tremendous liberation in setting down some self-imposed rules as an investor, and then seriously attempting to follow them.

Today, like no other generation before, we are swamped by information, and by envy. Both can be self-destructive to an investors long-term goals, which should be the creation of wealth, at the minimum possible risk for the path chosen.

Because we are swamped by information, we often think that we HAVE to act upon these messages to garner the maximum possible return. This is furthered by our natural state to want to be the best, do the best, and be seen as the best. We envy others who are.

This compromises our position as it should be in in order to be successful investors. And that is simply to be as rational as possible.

So without rules, we're kinda like a guy who the media tells him that he's after a woman. Without some rules, we flit about here and there - ranging from the wrinkled 80 year old Elbonian woman who doesn't speak English, to the 20 year old wunderkind with a 170 IQ. And everything in between. Many of whom are obviously ill-suited to us, our situation and even our temperament. So it is too with stocks and investments.

Some of my own rules include not looking at stocks without earnings, avoiding stocks with PE ratios above 30 and trying to find ones below 15, and an inclination towards financial sector stocks (I have a background here), and also away from large-cap stocks and towards small and micro-cap stocks. Because I've got these rules, I now find it much easier to avoid the siren song of "next great thing". While I don't always follow the rules (naughty boy, up to the blackboard you go!), more often than not, I'm sorry when I don't.

So my advice is to set yourself some rules, and try to follow them. Will you miss some wonderful opportunities? Absolutely! Will you make more money because you've focused your mind, and actually concentrated? Absolutely!


The Confused Capitalist

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