In today’s Exponential Investor:
- Don’t trust your memory
- What kind of investor are you?
- Know when to sell
“Take. Notes.” Commodities investing legend Rick Rule said to a packed-out auditorium on Tuesday. “When it’s gone from your mind, it’s gone forever.”
He quickly followed this up with, “Taking notes isn’t enough. At night, review your notes. And then make notes on your notes.”
An unlikely start to a natural resources conference
Of all opening statements for a global natural resources investing conference, this was unexpected. Rick didn’t start with where the price of oil is heading, what the future demand may be for gas or copper or some rare earth metal: nor did he talk about supply chains or geopolitics.
No. He told a room full of adults to write stuff down.
He didn’t need to tell me as the sound of my furious tapping filled the room.
At conferences like these, there is always something insightful and valuable that is said. And there is nothing more frustrating than trying to remember the context of what was said, let alone remember it word for word.
More to the point, Rick was right.
Writing or typing things down is one of the most important things you can do when it comes to investing.
But, even then, there is one basic thing you should know before you buy a single stock.
Don’t invest until you can answer these questions
I’m currently writing to you from Florida in the United States.
A late-night flight out of Australia on Sunday saw a very jet lagged version of me arrive just in time for the Rule Symposium on Tuesday.
Rather than being at a swanky hotel in Vancouver where the symposium is normally held, it’s at an even swankier resort called The Boca Raton, owned by tech infrastructure billionaire Michael Dell.
While I’d love to stroll around these fancy digs and lay by the pool with a cocktail or two, the conference schedule doesn’t have much down time. So far, the closet I’ve come to the pool is looking at it through the window while I write this.
Next week, we’ll go over some of the topics that have been covered at the conference.
That is because today I want to expand what Rick Rule started with: the basics of investing.
Now, I know you’re probably thinking the basics of investing is understanding the price-to-earnings ratio, or how calculate the earnings per share or even understanding what the “quick ratio” tells you about a company.
Don’t get me wrong, these are all good to learn. But they aren’t where you should start.
Because shortly after Rick told everyone to “Take. Notes”, he then went on to say “What kind of investor are you? Do have enough money? Are you an aggressive investor? How much risk do you want to take?”
In other words… know thyself.
This is perhaps the most overlooked part of buying and selling shares.
The “what” to buy should only ever come after you’ve asked yourself, “How much am I willing to lose?”
Because believe it or not, that’s the secret to good investing. Knowing when to get out.
How much money are you willing to lose?
Here’s the one thing no one tells you in a market crash: everyone should always be prepared to lose money.
It’s no secret that when stock markets fall, so does wealth. All that flashing red on trading screens means that someone is taking a loss. Yet most investors don’t believe it could possibly happen to them.
For too long, investors have had it drummed into them that they should buy shares for the “long haul”. Or build a portfolio that they can “set and forget”.
Well, that may in fact be the quickest way to lose money in a market crash.
The good news is that how much you lose is up to you.
The first step is psychological.
Investors need to accept that they will lose some money. But you can mitigate this.
There’s no point watching share prices tick down every day, eating into your portfolio. So, with any stock investment, it’s best to decide on a stop loss and stick to it.
Blue-chip stocks are often much harder hit in a market crash than people realise. So, investors are wise to set tight stop losses on blue chips.
However, there’s an upside to this: Selling shares for a minimal loss leaves investors with some cash left over.
After all, not all shares fall in tandem. Even in a falling stock market, you can find stocks that are going up.
Here’s another way of looking at it. Before you buy any shares, you need to have an exit strategy.
Ask yourself this: if the market crashed today, what’s the lowest amount I am willing to sell them for? Once you’ve answered this, you’re ready to go buy them.
As for what’s been covered at the conference, make sure you tune into the Exponential Investor podcast tomorrow and I’ll go over my favourite topics so far.
Come next week, we’ll delve into some of the meatier topics from the conference.
Until next time,
Editor, Exponential Investor