3 timeless rules to ensure investment success

Behind the countless correct decisions that compound to give us investing titans like Warren Buffett and David Einhorn, there are really only three fundamental rules which ensure success.

No matter what your style of investing, these three rules will give you the best possible base to build your wealth.

1. Don’t wipeout

If you take excessive and or unnecessary risks, you significantly increase your chances of wiping out (or worse, if you’ve borrowed heavily).

Wipeouts are simple to avoid. Avoid borrowing to invest. Don’t put all your eggs in one basket. And you know when people say they ‘would bet the house’ on ResApp Health Ltd (ASX: RAP)? Don’t do that.

There are rational arguments against some of these points. For instance, the fact that Warren Buffet safely used leverage to catapult his returns, or that it’s ridiculously cheap to borrow money. Both are valid, but leverage can instantly turn against you.

Similarly, people sometimes argue that concentrating a portfolio to just two or three businesses will increase returns when the companies do well. That can be true. But if you had pinned all your hopes on Santos Ltd (ASX: STO) in 2014, or Surfstitch Group Ltd (ASX: SRF) almost any time this year, your high-risk strategy is probably not serving you very well.

2. Compound, compound, compound

Compounding is the common thread which draws together investors of significant wealth. It’s the tool which does the serious heavy lifting for your portfolio.

Compounding can feel painfully slow, but by doggedly reinvesting your dividends and taking advantage of dividend reinvestment plans, wealth can grow at faster and faster rates.

3. Experience identifies opportunities

Experience also compounds rapidly, and as it does you will be able to identify repeating patterns of both risk and opportunity.

“I’ve seen this before” you’ll say.

It might be recognising the huge global potential of CSL Limited (ASX: CSL) or XERO FPO NZX (ASX: XRO), identifying where a commodity is in its cycle, or simply that your sugar-conscious friends have turned their backs on products from Coca-Cola Amatil Ltd (ASX: CCL).

You may watch two or three opportunities pass you by, but the fourth will stand out with the same key characteristics and your experience will mean you’re ready to pounce.

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Motley Fool contributor Regan Pearson owns shares of Xero. The Motley Fool Australia owns shares of Xero. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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