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Thursday, August 12, 2010

Five Essential Truths of Investing

Markets are notoriously hard to read and people see only what they themselves want to see.

Bulls will find reasons why certain stocks will go higher, while at the same time, Bears will find many reasons for the same stocks to go lower. The seldom-admitted truth is that most of the time, markets exist in some indeterminate state.

The main thing is that you cannot trust consensus and you cannot rely on the "Establishment." You can't find refuge in the herd and you must resist the urge to join the crowd. Your passion of the moment will most certainly create a disaster over the years.

On the other hand, if you do stick with the following five essential truths, you do stand a better than average chance to invest profitably:

1. Markets are unpredictable and ill-suited to forecasts.

2. Long-term fundamentals are key.

3. Investor emotion leads to volatility.

4. Valuation discipline should guide investment selection.

5. Perspective and patience are always well rewarded.