Investing is a tricky game to become accomplished at, let alone master. Even the best investors in the world like Warren Buffett speak of being constant learners. Much like the wonderful powers of compound interest, proficiency in investing builds on your past successes as well as your mistakes (or lack of repeating them). Thus, I've found that harking back to the basics can often give your returns a boost.
So, here are 2 investing lessons that I think many investors have forgotten about during an unprecedented year in the markets.
Investing lesson 1) Winners often keep winning
This is a popular concept here at the Fool. Usually, if a company is doing something right (that might cause its share price to rise), it will keep at it. Too often, investors sell out of a top-performing company in order to 'take profits off the table'. Whilst it's true that no one goes broke taking a profit, it's also true that winners often keep on winning.
As a past victim of this phenomenon (I sold CSL Limited (ASX: CSL) shares at $180 after doubling my money), I can tell you about the lost benefits of not sticking with a winner firsthand. So if you have a company that's doing everything right, you don't want to cut yourself loose chasing a hollow gain.
Think about how silly someone who sold out of Xero Limited (ASX: XRO) at $20 would feel today. Or Afterpay Ltd (ASX: APT) at $12. Or Amazon.com at $100. If you have a winner, don't kill the goose if it keeps laying the golden eggs.
Investing lesson 2) Using debt is often a bad idea
Proponents of gearing and leverage (other names for investing with borrowed money) will tell you its the best thing they've ever done. But the reality is that investing with debt is a high-risk strategy – and one that could see you go back to square one very easily. Remember, borrowing to invest can magnify your gains in a bull market, which can be intoxicating. But it can also magnify your losses if things go south. And in these uncertain times, I think making a leveraged bet that the share market will continue to rise uninterrupted in the coming months and years is a big call.
Keep in mind that if you have a margin loan, it can always be called in by your lender, especially during a share market crash. Having to sell your shares at the bottom of a market cycle can undo years of progress. You don't want to end up where you were 5, 20 or 20 years ago, just because you took on too much debt.
