Some of these are basic tips for beginners, some are more relevant for more experienced investors. Most are generally accepted, a few are more contentious. Some are received wisdom, some are back by research research, some come from my own experience.
There were originally 40 tips, but I have added one more , and will add more as ideas occur to me, and people make suggestions.
- High returns usually mean high risk. It is useful to think in terms of the risk premium.
- If you do not understand why its cheap, it probably is not cheap. Assume the market has priced everything fairly unless you are sure it has not.
- If you do not understand it, do not buy it.
- Keep valuation simple: complex models are unreliable. (Thanks to Richard Beddard for noticing the omission)
- Day trading is zero sum game, investing for the long term is not.
- Private investors trading short term are at a huge disadvantage compared to hedge funds, banks' proprietary trading, and , in particular, high frequency traders.
- Out-performing the market is also a zero-sum game.
- If you get more than half your picks right, you will beat the market.
- It is very easy for stock pickers to cherry pick numbers that make them look good. Be wary of fund manager's performance claims (some funds will do well by chance — consistency across time and funds is harder). Be even more wary of tip sheets.
- There are very few people who can pick investments well enough to be worth what they will charge you.
- Most active fund managers are closet tracking with most of your money. That makes them even more expensive.
- The value effect is reasonably well proven over the long term. Consider using ratios such as naked PE and CAPE.
- Value investing is not always best: there are periods when growth stocks will out-perform.
- If everyone is talking about how good a particular investment, or asset class (shares, tech stocks, property, whatever), is, then it is probably over-valued.
- There is usually a greater fool. Get your timing slightly wrong and it will be you.
- Fund managers are penalised if they avoid a bubble too early, because they under-perform until it bursts. People were sacked for avoiding tech stocks in the early years of the dot com bubble.
- Dividend yield not only tells you how much income you can expect from a share, but, if you exclude special dividends, it tells you how confident the mangement are about earnings.
- If profits have fallen, or might fall, sharply, there might be a risk of dividend cuts.
- A high level of regular share buy backs means that dividend yield is not an adequate measure. Adding the buy-backs to the yield helps, but it still dilutes the signal of confidence. The supposedly clever idea of tying directors remuneration to share prices (e.g. by giving them options) gives them an incentive to use buy-backs (which increase the share price) rather than increase dividends.
- Even if you are not investing for income, you still need to adjust analysis of cash flows for buy-backs.
- Know whether you are using derivatives to hedge or speculate.
- Forecasts of the economy, markets and earnings are biased towards optimism. They are even more strongly biased towards expecting whatever happened previously to happen again. They are yet more strongly biased towards not disagreeing too much with the consensus.
- Forecasters who always disagree with the consensus are usually wrong.
- You may be right about a bubble, or a serious under-valuation, but it might take a lot of patience before you can profit from it.
- Look for what might make the market re-rate a share. You might think that its cheap, but what is going to happen that will convince everyone else?
- If you are knowledgeable about a particular industry it might give you an edge in picking stocks within it. Are a company's new products good or bad? If their reputation good or bad, improving or deteriorating? Is demand likely to grow or fall?
- Investing too heavily in the industry you work in is bad diversification — if the industry has a bad time then, for example, your portfolio might be wiped out just as you get made redundant. Lots of people made this mistake during the dot com bubble.
- A good business is not necessarily a good investment. A bad business is not necessarily a bad investment. Everything (well, very nearly) is worth buying if its cheap enough, and nothing is worth buying if it is too expensive.
- Good products or technology do not necessarily make a good business, let alone a good investment: but they can!
- Diversify. Spread your money across companies, sectors, countries and asset classes.
- “If you feel like investing in commodities, lie down till the feeling goes away”. Diversification is a good reason to invest in commodities, but even that can be achieved by investing in shares linked to those commodities (such as miners).
- For gold to make a profit it does not merely have to go up in price: it has to go up enough to cover the interest lost compared to safe alternatives, and to cover the risk of theft or loss (or insurance to cover it). The same applies to other commodities
- The best time to profit from currency trading, is when a government is trying to buck the market.
- Almost every way of investing indirectly, even apparently innocuous collective investment vehicles, can be abused to create high risk investments through gearing or complex division of profits and risks. Look for transparency and simplicity.
- The risk of disaster is almost always underestimated (except just after a crash actually happens). Technically this is described as a fat tail. The practical implication is that you should always regard a market crash as a real risk.
- If a share price falls you have made a loss, whether or not you realise the loss by selling. Never be afraid to sell and cut a loss.
- Read the notes to the accounts. Hardly anyone else, even analysts, seems to bother, so it might well give you an edge.
- Emerging markets offer the best growth opportunities, but they are badly regulated to the best opportunities usually go to local big operators, whether through insider trading, or by defrauding minority shareholders, or simply buying the best deals long before they are listed.
- Never forget tax, especially for low risk income investments — but its always more important to make a profit in the first place than to avoid paying tax on it if you do.
- If you are not sure, play it safe. There are times when the best thing to do is to stick the lot in index linked gilts.
- You need a good source of knowledge to look up stuff you you are unsure about (ahem!).