3 Rules I Use To Pick ASX Shares
Sharemarket investing has a steep learning curve. But once you’ve committed to investing in yourself, it’s really exciting — and it can be exceptionally rewarding.
My number-one rule is this: don’t lose money.
Imagine you have $10,000 and your investment drops 20% in the first month and you sell. You’re left with $8,000.
So what? To get back to your initial $10,000 you need to make a 25% return on your reduced amount.
Meaning, percentages work against you on the downside. In the book, Value Investing, each of the highly successful investors had one simple rule: analyse how they might lose money before focusing on the gains.
One way I do this is by doing a ‘worst case’ valuation before I commit to an investment.
Only then do I focus on how much I might gain.
In the long run, I think good investing performance is anything more than 8% per year. To get to that, you don’t need to swing for the fences. But you will need to avoid blow-ups.
8% per year compounded can have an incredible impact on your wealth.
Learning is the key to success.
Learning is key to investing success. Reading, writing, watching, debating and learning from the success and failure of yourself and others.
There are many ways to learn, acquire knowledge and invest better. But it takes time and effort.
As I wrote recently, investors call this our ‘circle of competence‘. Growing our circle of competence is vitally important.
Patience is our greatest advantage.
If you do the average thing you’ll get average results. Good investors have an advantage over other people.
Broadly, I think there are three common types of advantages: better information, superior analytical ability, and temperament.
It’s the last one (temperament/behaviour) that you and I can master. It’s one that professional advisers, who have investors to please, can’t do as easily.
One of my favourite Australian investors, Wayne Peters of Peters MacGregor in Sydney, calls this ‘timeframe arbitrage’.
It’s the ability to buy and plan to hold an investment for five or ten years.
If I could go back to my younger self and tell him one thing about investing it would be this: buy shares in great businesses and hold them for many years.
Commonwealth Bank of Australia (ASX: CBA) shares have fallen since the beginning of 2017 but for long-term investors, it has been an absolute delight — even if the shares performed really badly from one year to the next. The long-term performance is what counts.
(for the record I’m not buying CBA shares today!)
I’ve already offered my 3 top investment ideas to Rask Invest members and each of them are showing gains. It has only been going a few short weeks but I’m thrilled to see the gains so far.
If all investors avoid losing money before focusing on the gains, invest in themselves and aim for the long term, I think our returns are sure to improve.
Cheers to our financial futures!