Investing basics: 3 rules that helped me become a better investor

Investing basics may seem simple, but they are fundamental to the success of any investor, whether first starting out or with years of experience. James Reynolds lays out the four rules that guide his decision making.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Investing basics may seem simple, but they are the foundation on which all successful investors base their decisions. Many of my best decisions were made when remembering these rules. And many of my biggest mistakes were made ignoring them.

No one’s making you swing

Warren Buffett once compared choosing investments to batting in a game of baseball, save for one key difference. There’s no rule that says you have to swing. This means I can take the time to really think over every opportunity that comes my way, and if I’m not 100% certain it’s a good bet, I don’t have to take it. This has meant I’ve missed some great investments, but there’s nothing wrong with that. There will always be more opportunities, more chances to swing. And when it comes to my hard-earned money, it’s better to play it safe.

Don’t be lazy. Do your research

It really doesn’t take much effort to learn a little about a company, and that research can be the difference between making a great investment and losing lots of money. Of course, I need to know what I’m looking for, so I ask myself:

  • Does the company offer a product or a service?
  • Is it expensive to run?
  • Does it have a lot of competition and if so, does the company have an edge over similar companies?
  • Does it have a lot of debt or large profit margins?

Most of these questions can be answered by looking at a company’s financial statements and by using a bit of common sense.

Don’t buy the news

It’s important to keep up with the news and know what’s going on in the wider world. The problem with following the news too closely is that it can cause us to invest reactively rather than proactively, leaving us always one step behind the market.

One of the biggest mistakes I ever made was buying shares in a company that had just made the news because the stock price had gone through the roof. Shortly after, the price crashed. Because I was a novice investor, I panicked and sold. The entire process just cost me money and caused me stress.

Now I do my research first and never buy a company I hear about in the news.

Investing is a marathon, not a sprint

Every single person on the planet is susceptible to the influence of two key emotions. Fear and greed.

It’s fear that makes us sell our shares when the market goes down, and greed that pushes us to buy when prices are at all-time highs. If I don’t keep these emotions in check, I might as well just burn my money.

The trick is to remember that investing is not about making money today. It’s about building wealth over the long term.

The best thing I ever did was buy shares and forget about them. Prices will fluctuate up and down in completely unpredictable ways for years, and I realised that if I spent my days watching them, I would only lose the strength of my convictions.

All investing brings with it risks but our job as investors is to manage those risks and try to stack the odds in our favour.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

James Reynolds has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Middle-aged white man wearing glasses, staring into space over the top of his laptop in a coffee shop
Investing Articles

2 shares I changed my mind about in today’s stock market

This writer explains why he changed his opinion on these two shares, even though both are highly valued in today's…

Read more »

Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Google office headquarters
Investing Articles

1 reason I like buying S&P 500 shares – and 1 reason I don’t

Will this investor try to improve his potential returns by focusing more on S&P 500 shares instead of British ones?…

Read more »

Young woman holding up three fingers
Investing Articles

3 SIPP mistakes to avoid

Our writer explains a trio of potentially costly errors he tries to avoid making when investing his SIPP, on an…

Read more »

Smiling white woman holding iPhone with Airpods in ear
Investing Articles

Here’s how (and why) I’d start buying shares with £25 a week

Our writer uses his investment experience and current approach to explain how he would start buying shares on a limited…

Read more »

Aerial shot showing an aircraft shadow flying over an idyllic beach
Investing Articles

Here’s my 5-step approach to earning passive income of £500 a month

Christopher Ruane explains the handful of steps he uses to target hundreds of pounds in passive income each month.

Read more »

Investing Articles

2 UK shares I’ve been buying this week

From a value perspective, UK shares look attractive. But two in particular have been attracting Stephen Wright’s attention over the…

Read more »

Investing Articles

A lifelong second income for just £10 a week? Here’s how!

With a simple, structured approach to buying blue-chip dividend shares at attractive prices, our writer's building a second income for…

Read more »