It is not necessarily the smartest or most knowledgeable investor who earns the highest returns. It is the one with the most wisdom and experience. Studying the world’s best investors, you will find out that while they use various methods to achieve their success, they tended to have the same core principles.
Here are 5 core principles of successful investing:
No. 1: Take smart risks, not extraordinary risks
Risk and return generally go hand in hand. Take very low or very few risks and your returns will be low, too. The key to earning extraordinary returns is not taking extraordinary risks. Extraordinary risks can quickly destroy the performance of a portfolio but extraordinary returns are the result of consistently applying proven principles and strategies. The world’s most successful investors compound their money at a high rate over a long period of time.
No. 2: Keep costs low
When you pay commissions, management fees, wrap fees, front- and back-end loads, inactivity fees and surrender penalties on your portfolio, these cost reduces your real-world returns by exactly that much. Management fees have been coming down for years. Trading costs at most discount brokerages are now zero. Yet there are still lots of products sold to unwary investors that are laden with hidden charges and fees. Avoid them. The goal is for you to get rich, not your broker or financial advisor.
No. 3: Be prepared for setbacks and losses
Great investors know the markets are not a one-way road and are prepared for the unexpected. Even when the market is doing well, not every investment idea works.
No. 4: Question or defy conventional wisdom
Great investors don’t care about the prevailing narrative or whether other people agree or disagree with them. They profit from the misperceptions and mistakes of those who think less rationally, rigorously or objectively. Many of the best investors have an emotional detachment from market volatility. When others are enthusiastically buying, they are happy to sell to them and when others are panicking and selling, they are more than happy to buy.
No. 5: Seek any advantage possible
Great investors are willing to consider anything that might give them an edge: psychology, history, geography, economics, science, philosophy or politics, to name just a few. The best investors consciously and consistently seek any advantage that will maximize their odds of success.
Sven Franssen