The most important lessons I can teach anyone about investing

Most articles about investing focus on how you can get rich investing, because reader behaviour tells us that’s what people want to know.

But I’m going to take a different angle…

You might not thump the market every single year and retire rich by age 50… and you’re probably not the next George Soros. But what you can do, is retire a lot earlier than you would otherwise, and have a lot more time to share with family and on leisure. But only if you learn the most important lesson about investing…

Rule Number 1 (as Warren Buffett puts it): Don’t lose money.

Here are my top four tips to avoid losing money on the sharemarket…

1. Diversify – this is absolutely key. Virtually anything is possible in this life, and even blue-chip companies like Commonwealth Bank of Australia (ASX: BHP) and BHP Billiton Limited (ASX: BHP) could hypothetically run into trouble. For example, a serious housing market crash in Australia would do enormous damage to Commonwealth Bank, and a house price crash in China could seriously hurt BHP, because Chinese construction is such an important driver of demand.

2. Never become a forced seller. The number one reason to always keep a cash barrier is to avoid the temptation to sell shares to buy a gift, pay your way out of an emergency or sell your shares for any reason other than because you’re offered a great price.

3. Avoid heavily indebted companies and favour companies with net cash. To quote Buffett again, “you only see who’s been swimming naked when the tide goes out”. For example, the drilling company Boart Longyear Ltd  (ASX: BLY) may seem cheap because its share price has declined about 80% in the last year, it is a global business, it has revenues of (probably) well over $500 million and its market capitalisation is just $40 million.

However, this “microcap” stock carries debt of over $540 million, excluding contingent liabilities, which I estimate to be about $10 million. To put this in context the company saw fit to spend about $280 million of cash on capital expenditure in 2012, and now the interest repayments would appear to substantially exceed cashflow from operating activities. Sure, the share price might rebound from current levels, but the chance of total capital loss (or close to it) is unacceptable to me.

4. Finally, avoid management with questionable ethics or bad judgement. If management is not looking out for small investors, the odds are stacked against you (especially if you’re a long term investor).

You can avoid financial disasters by buying strong, established companies with piles of cash, and top notch management.

Indeed, the best investment you can make is in your own knowledge, so discover our latest report on Warren Buffett's greatest wisdom, along with 2 ASX companies we think fit Buffett's investment criteria, including one company that has a wonderfully strong cash buffer!

Your copy is 100% FREE when you click here (so there's no risk of capital loss)!

Motley Fool contributor Claude Walker (@claudedwalker) does not own shares in any of the companies mentioned in this article. Disclosure is important, so good on you for reading this far.

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