The Motley Fool

3 simple investment rules I live by

One of the hardest parts of investing is knowing where to start.

Do you want dividends or capital growth? Big companies or small? Commonwealth Bank of Australia (ASX: CBA) or National Australia Bank Ltd. (ASX: NAB)?

As legendary investor Howard Marks says: it’s not easy.

Index funds are one quick solution to the problem. But another is to start investing slowly and adopt some basic principles to guide your investing decisions.

My own principles have become a valuable foundation for how I think about businesses and (mostly!) prevent me from making emotionally charged decisions when I’m feeling greedy or fearful.

There are three simple principles I follow for investing:

1. “Make your portfolio reflect your best vision for our future”

I have adopted this quote from Motley Fool co-founder David Gardener as a guiding principle for my investing.

It forces me to think about how the world might look in 5, 10 or 15 years’ time and to consider how a particular company fits into that view of the world.

For example, cloud business platform Xero Limited (ASX: XRO) is a business I see as having the long-term potential to massively enrich the way small businesses operate around the world.

Similarly, I think that people will increasingly need the types of blood-products produced by CSL Limited (ASX: CSL) in the years to come.

2. Own companies with a long-term, sustainable advantage

Without a sustainable competitive advantage, a company can’t win business from competitors, can’t dominate in its market and can’t compound at above-average returns for its owners.

This is a problem I see facing FlexiGroup Limited (ASX: FXL) as it scrambles to hold market share in the face of new online part-payment competitors like Afterpay Touch Group Ltd (ASX: APT).

3. “Compound your face off!”

In my experience compounding returns over time is the only investing secret there is to know so I love this aggressive quote by author and Portfolio Manager Wes Gray.

It reminds me to reinvest my dividends, hold on through market cycles and let my winners run.

It takes time to narrow down the principles that work best for you, but you can significantly speed up the process by reading widely. This will quickly identify the types of companies and investors you can closely relate to helping build your own principles.

5 stocks under $5

We hear it over and over from investors, "I wish I had bought Altium or Afterpay when they were first recommended by The Motley Fool. I'd be sitting on a gold mine!" And it's true.

And while Altium and Afterpay have had a good run, we think these 5 other stocks are screaming buys. And you can buy them now for less than $5 a share!

*Extreme Opportunities returns as of June 5th 2020

Motley Fool contributor Regan Pearson owns shares of Xero.

You can follow him on Twitter @Regan_Invests.

The Motley Fool Australia owns shares of AFTERPAY T FPO and Xero. The Motley Fool Australia has recommended FlexiGroup Limited. 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 Scott Phillips.

Related Articles...

Latest posts by Regan Pearson (see all)