The more time we devote to learning how to invest, the more we learn from our own mistakes and the mistakes of others, the greater the chance that we will find ourselves in the group of those people who will more often be on the winning side, achieving good results. The basic rules that should be followed by a stock market investor are seemingly simple and obvious, but in practice they are extremely often ignored by both novice investors and those with more experience. Meanwhile, their use can have a very significant impact on the investment results achieved.
Rule 4 – Let profits grow, cut losses
This is a principle that is de facto a derivative of all three previous principles. It is a mixture of psychology, strategy and skilful position and portfolio management, but also a derivative of the belief that virtual losses are not a real loss. Failure to apply this rule means that investors very often allow their losses to grow irrationally, because they are still counting on a rebound in the exchange rate.
In the case of growth, it is most difficult for investors to survive downward corrections and tiring, sometimes multi-month consolidations occurring in uptrends. In the case of downward corrections, the investor fills himself with fear and anxiety that this is the end of the uptrend, getting rid of the profitable position prematurely and saving the profit that is left.
In the case of consolidation, especially when other companies are growing and when the market is growing, the investor cannot emotionally cope with the belief that he is losing the opportunity to make money on other companies, also often deciding to close a profitable position for this reason. And even more often, investors close profitable positions when, after reaching a bottom after a bear market and a very long consolidation, the price finally breaks up strongly at high turnover. Meanwhile, such a breakout often takes place in the first phase of later, longer uptrends. In this way, investors usually get rid of well-picked stocks at the very beginning of the trend.
When shares fall below the purchase price, their propensity to sell decreases significantly and often a short-term investment, e.g. speculative, turns into a long-term investment in anticipation of making up for losses. Plaintiff? Inability to come to terms with loss and irrational acceptance of an unlimited level of loss. This often ends with the sale of the shares at the bottom.
Probably many readers are well aware of these situations, and many have experienced them personally. In order to react appropriately in such cases, you must always have a clearly defined strategy of action, and be able to control your emotions. You also need to know for what purpose you have invested and how much you can lose on a given investment. If we also have a well-analyzed company, we should not experience such negative situations too often. It is worth noting that it is definitely easiest to apply this principle when we have a properly diversified portfolio. It is certainly more difficult when the portfolio is based only on one or two positions, which is obviously a wrong way of management. This is because then the emotions associated with a single position and dependence on its price changes make it much more difficult to make rational decisions.
Principle 5 – Education above all else
Many investors, especially beginners, believe that investing is not that difficult at all, but they usually change their minds when their wrong decisions and lack of knowledge lead to the loss of a significant part of the invested capital. On the other hand, people who have been on the market for a long time, especially those entering the market in a good economic period, who have not yet experienced a strong bear market, believe that since they are doing quite well, learning is not so necessary at all. Then, however, the first potential bear market verifies their ability to invest.
Of course, such situations absolutely do not have to be the rule, because there is also a large group of investors who take their role very seriously, starting education even before entering the market. The facts, however, are that an investor must learn throughout his life. Certain analytical elements are timeless, of course, but markets as such change. Each new bull market, consolidation or bear market teaches many new things. The best results, on the other hand, are achieved by people who have approached their role as a stock market investor professionally from the beginning and systematically expanded their knowledge.
Currently, there are many websites on the market offering educational materials about investing, numerous open and closed training webinars are organized, as well as a whole range of excellent professional literature is available.