This post Rules to Invest By appeared first on Daily Reckoning.
Yesterday, I said the three most important words in investing are “I don’t know.”
I believe that strongly. But that doesn’t mean you become paralyzed with fear and do nothing. Otherwise, you’d never make a single investment.
It just means you have to approach your investments with honesty and humility, no matter how much of a sure thing it seems at the time.
The “sure things” have a funny way of exploding in your face. And the toughest investments to make, the ones where you’re full of doubt, often turn out the best.
So what are the best ways to make money in the market?
Yesterday I told you about: #1. Pick some stocks and hold them forever.
But What stocks should I hold? Warren Buffett has some advice on this (and I know because I wrote THE book about him. A friend of mine who knows him told me my book was the only book that Buffett thought was accurate about him).
So since I don’t know anything, I will let Warren Buffett take over here. He says, “If you think a company will be around 20 years from now then it is probably a good buy right now.”
I would add to that, based on what Warren does. It seems to me he has five criteria:
1. A company will be around 20 years from now.
2. At some point, company’s management has demonstrated in some way that they are honest, good people. If you can get to know management even better.
3. The company’s stock has crashed for some reason (think American Express in early 60s, which he loaded up on. Or Washington Post in the early 70s. Or Coca-Cola in the early 80s).
4. The company’s name is a strong brand: American Express, Coke, Disney, etc.
5. Demographics play a strong role.
With Coke, Buffett knew that everyone in the world would be drinking sugared water before long. Who can resist? He also started buying furniture companies right before the housing boom. He knew that as the population in the U.S. grows, people will need chairs to sit on.
Note that Buffett is not what some people call a “Value investor.” But I won’t get into that discussion here.
What else? One time I accidentally got an email that was intended for a famous well-known investor. It was from his broker and contained his portfolio. I can’t say how this accident happened but it did.
Of course, I opened the email. This is a man who writes about lots of stocks. Guess what?
His entire portfolio was in municipal bonds…
Should I put all of my money in stocks? No, because you’ll never know anything about a company and you won’t get the kind of deals that Warren Buffett gets.
So use this guideline:
no more than 3% of your portfolio in any one stock. But if the stock grows past 3% you can keep it. To quote …read more
Source:: Daily Reckoning feed
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