The 7 Laws of Investing - The Hyperion Effect

Barry Ritholtz is a prominent market commentator who runs a great website called The Big Picture from which we often refer to articles or concepts that he has raised. Recently he wrote a piece on the 7 laws of investing which is a great read so be sure to check it out. If you don’t have time to read the full piece I have set them out below with some thoughts of my own.

1. Always insist on a margin of safety

Goes without saying really, make sure that you are comfortable with the amount you invest and always make sure that you have some set aside for an emergency or to weather a downturn.

2. This time is never different

Property prices always go up, it doesn’t matter if the Internet company isn’t making a profit it’s all about page views, there will always be demand for tulips!…….do we need to say anymore?

3. Be Patient and wait for the fast pitch

I disagree with this one somewhat in that it is implying that you should wait for the right opportunity to invest. I would argue that it is always the right time to invest as the act of making the investment is part of a wider strategy to achieve your goals so timing is not relevant. However it is also pointed out that investors often feel an ‘action bias’ when taking no action is a better decision which I most definitely agree with.

4. Be Contrarian

Warren Buffet famously said ‘Be fearful when others are greedy and greedy when others are fearful’. Nicely sums up the Contrarian approach although I would add that consistent investing will also achieve this aim as you will buy less when markets are high and more when markets are low if you consistently invest a regular amount over a regular period.

5. Risk is the permanent loss of capital, never a dollar amount

Higher returns ALWAYS mean higher risk. This rule also requires you to refer to rule 7 at the same time.

6. Be Leery of Leverage

Gearing is a strategy that should only be undertaken with advice from a professional advisor who can ensure you have appropriate safeguards. It is a tool that can be used for particular people in particular situations, it is not a ‘Strategy for the masses’ and should be used cautiously.

7. Never invest is something you don’t understand

Investing is simple, others make it complicated, so if you don’t understand it don’t invest in it.

Let me know if you disagree with any of these.

Related Posts