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7 timeless investing principles

By Sam Instone - July 26, 2022

Sound investment advice doesn’t change.

But neither do investor worries or irrational behaviour...

It may seem like each new thing that comes along is unique, but in reality, we see history being rewritten – slightly differently – over and over again.

Investment books, articles, and advice in the media just cycle along with the markets, each time providing opportunity to update the advice that was given in the past.

Successful investing ultimately boils down to simple, common sense ideas.

Simple however, does not mean easy. 

Investors continue to make the same mistakes.

This week, I came across The Art of Investment, a 1922 book by Morrell Walker Gaines.

In it, he covers 7 investment principles, all designed to provide foundational knowledge for the average investor.

But much of what Gaines wrote 100 years ago is as applicable today, as it was then.

Average investors and savvy, high-net-worth professionals alike. 

The 7 principles from Gaines are:

Progress towards your goal is more important than short-term stock performance

"The first principle is that business will come back. It will neither remain depressed nor exalted.”

Ignore the noise and maintain perspective – volatility is normal

“The second principle is that security prices are finally governed by the course of business and the related changes in credits. The extremes of high and low in stocks are displays internal to the market and are ironed out after a time by stronger external forces. It is only in a limited sense that the stock market forecasts business… The ends of market movements, the height and depth of speculation, almost invariably over-run the real trend of business and go counter to the true outlook, because speculative forces have been aroused into motion and have gained a momentum which carries them to extremes.”

Boring over exciting is more often than not the right approach

"The third principle of investment is that only the upbuilding companies, already strong against storm and depression, are worth investing in… There are times of greater and times of less risks, and there are ways of analyzing and appraising risks and of protecting against them. For most people, and at most times, the simple principle of sticking to investment in solid, progressive companies and first-class securities is by far the best; and of avoiding the dangerous attempt to increase income by purchasing securities of extra high yield. It is quite common for investors to run a disproportionate risk as to principal, which is all that they have, for the sake of an inconsequential increase in income, from holding inferior bonds and stocks.”

Diversify your investments to reduce risk. Build an emergency fund

“The fourth principle of investment is that the type of securities should be chosen which best suits the purpose of the investor. He should have a definite object in mind and choose a fit security of a fit company. The investor has to run his investments like any business undertaking. If he has all of his money in stocks, which are a proper investment in their place and time, he has subjected himself unreservedly to the major risks of the unexpected changes in markets and conditions…

The investor should have a cash reserve, so that if there is a slump in security prices he can go into action and buy cheap, instead of being put out of action by being loaded up with securities that have depreciated.”

Remember the trade-off between risk and return

"The fifth principle of investment is that the value and the price of a security are to be weighed and the risk of loss set over against the chance of profit.”

Maintain long term discipline – time in the market offers opportunities

"The sixth principle to be observed by the investor, partly covered in the preceding paragraphs, is that the phase of business cycles and security prices which determines both value and risks also determines the kind of security to be bought. Each stage of the business progress – prosperity, depression, and transition has its most appropriate type of securities. Each phase of the security market cycle also presents its best types and opportunities… He can take opportunities as he sees them, governing himself by the long-distance view.”

Know what you’re investing in and why

“The seventh principle of investment, the most general and underlying all others, is that the investor must know all the elements of his investment — the company, the security, the stage of business and of market prices, and the outlook for credit and banking. He must understand. Where he knows, he can invest. Where he does not know, he is only speculating…”

So there we have it.

The stock market is a giant distraction machine, that drives investors to act against their best interests. 

Stay in your seat, follow the above, and stick to your plan. 

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