Three Steps You Should Take Before You Invest a Dime

Plus dividends. Add a few percent on top.

Not very exciting, but a “no brainer”: you don’t have to think about it.

It’s not which benchmark you choose; it’s that you choose one.

Because if you can make 5%, 8%, 10% or even more per year on average by doing nothing, there’s no point in doing something—unless you can beat that benchmark.

For many of us, that “something” is to invest our time and energy in maximizing our salary or business profits (and having more money to salt away) than becoming an active investor.

But if that’s the avenue you choose,

2. Stick to What You Know

Every great investor specializes.

Warren Buffett specializes in businesses he can understand. If he doesn’t understand it, he doesn’t look at it a second time.

Traders like George Soros specialize in markets where they expect the “mood of the market” to cause dramatic price movements—up or down.

Sir John Templeton looked for undervalued foreign markets.

Computer geeks build automated trading systems to profit from tiny price differences between different markets: New York and London or Chicago, commodities, futures versus options, to name just a few.

Benjamin Graham (author of The Intelligent Investor—“By far the best book on investing ever written” according to Warren Buffett: read it!) specialized in stocks priced at under their liquidation value.

A friend of mine turned a hobby of buying pre-1966 US silver coins into a multi-million dollar collection of rarities.

There are hundreds of such niches in the investment market place. Find yours—your “Investor’s Edge.”

Everybody has an edge—or can create one.

Say you’re an accountant. You have all the necessary skills to pull company balance sheets and profit and loss statements apart to find hidden values that aren’t reflected in stock’s price.

A real estate agent? You know your local market intimately. Why would you think about biotech or bitcoin when real estate bargains are probably coming across your desk every week—and you haven’t even noticed them.

Buying a house? Instead of that mansion you’re lusting after that would put you in serious debt, how about something cheaper that’s a bit run down (and so even cheaper). Fix it up and you can sell it for a profit in a year or so.

Repeat.

Are you a customer? Of course you are. Is there somewhere you keep returning to because you have such a great “customer experience”? If it’s a great business it could be a great investment. Wander around with your eyes wide open and you could stumble or Google on something new and exciting that might be “The Next Big Thing.”

Whatever else you do, cut through the sizzle and get to the steak.

The “sizzle” is the story stock promoters use to hustle the ignorant investor. The sizzle pushes everybody’s “greed buttons.” When that opens your wallet you’re throwing money away based on your emotions (just like I did when I was 19 which, unfortunately, was not my first and only time).

The steak is where you’ll find the value—or lack of it.

Believe me, when you’re investing, the grass isn’t greener on the other side.

3. Figure out How Much You Could Lose if You’re Wrong

As I demonstrated in The Winning Investment Habits of Warren Buffett & George Soros, the first thing that comes to a great investor’s mind is not how much he can make but how much he could lose. As Warren Buffett put it:

Investment Rule #1: Never lose money.
Investment Rule #2: Remember Rule #1.

Capital preservation is his first priority.

Why?

Say, like Warren Buffett, you can average 20% on your investments a year. Lose 50% of your capital and it’s going to take you 5 years to get back to where you started!

Not worth the risk.

When starting out you’re likely to be wrong more often than right. Calculating potential losses and guarding against them is the investment equivalent of “run away to fight another day.”

As trader Larry Hite put it: “If you don’t bet, you can’t win. If you lose all your chips, you can’t bet.”

One last thing: the very worst thing that could happen to you is that you get lucky and make a zillion times your money on your very first investment.

You’ll be over the moon—and probably feel you’re a stock or commodity market genius.

Gripped by the feeling that you’re “a legend in your own mind,” you’ll probably plunge back to the market—and lose your shirt. (I’ve seen that happen more than once and, gulp, been there, done that myself.)

Making a profit is a wonderful feeling, no matter how many profits you may have made in the past.

But in the markets, letting your emotions trump your mind is a recipe for disaster.

Banking profits is exciting—but good investing is boring.

So before you “let your profits ride,” wait till you can get yourself back into a thoughtful mental state, and make your second investment even more carefully than you made your first.

And to jog your memory that the great investor’s first priority is always capital preservation, it might be a good idea to print out this reminder and pin it up where you’re going to see it every time you call your broker or go online:

. . . And Learn From the Masters

You can learn anything by trial and error. But that’s an expensive way to learn.

Better to have a mentor or two. Preferably a mentor who’s a genius at what you want to master.

Which is what Warren Buffett did: he studied and worked with Benjamin Graham.

Unfortunately, the Buffetts of this world are usually too busy “doing their own thing” to take on a student.

Thankfully, there are dozens of books about Warren Buffett, including my The Winning Investment Habits of Warren Buffett & George Soros.

But the best place to start is with Buffett’s own words: in Berkshire Hathaway's annual reports.

If you’re a trader or speculator, Van Tharpe’s Trade Your Way to Financial Freedom is a good place to learn more strategies.

Not sure which category is better for you? Discover your unique Investment Personality here: https://marktier.com/ip.

Another facet of a successful investor’s “toolbox” is a system: a detailed methodology they follow to successfully apply their investment or speculative approach.

In addition to the examples you’ll find in The Winning Investment Habits of Warren Buffett & George Soros, there’s the amazingly simple system followed by Andrew Hallam, author of The Millionaire Teacher—who became a millionaire on a teacher’s salary.

That’s an impressive achievement!

And in my humble opinion, if a teacher can do it, so can you.