6 Rules Of Investing | Rules To Know Before Investing | Lab Of Rich

6 Rules Of Investing

In this blog, you will learn about The 6 Rules Of Investing. This information is taken from multiple books like "The Intelligent Investors" "Learn To Earn" "Beating The Street" etc.

Rule No 1 -: Learn A Lot, Read A Lot

Warren Buffett was 10 years old when he went to a horse race in Omaha. He used to collect the tickets which were thrown by the spectators because he knew there were very high chances of getting a winning ticket. Therefore he used to collect 1000 tickets and check the numbers on the tickets and match them with the winning number. Many times he gets the winning amount.

Warren Buffet had the habit of reading and being patient since childhood and because of this habit, he became very successful in life. At the age of 11, he started investing and started reading Moody's Manual ( a book in which companies' financials are written ). He used to read 10 hours a day.

Rule No 2 -: Know What You Own

When the children of 7th standard were given the task to make a portfolio of the stock market then their portfolio performed better than mutual funds' professional portfolios.

When the results came and peter lynch studied children's portfolios then he noticed that children had selected the companies whose products they used in their daily life like Nike, Coca-Cola, Disney, Pepsi, etc.

Student portfolios earned a 70% return in 2 years whereas mutual funds professionals earned a return of 26% In the same time period.

Instructions that were given to students before selecting stocks.

1. Whatever company's stocks they select, they will have to tell in front of the whole class what that company does.
2. They will have to read the news of the selected companies and tell the whole class what is happening in that company.
3. They have to write a reason on a paper why they have selected a company.

People invest in companies that are new in the market and earn very less return and sometimes losses, but they don't invest in the companies whose products they use daily and this is a big mistake.

Warren Buffet Says “Investing Is Simple But Not Easy”

Rule No 3 -: Over Long Term It's Better To Buy Stocks In Small Companies.

Reliance's market capitalization is Rs 16.6 lakh crore. If you invest in the company and want your money to be 10× then the market capitalization of the company should be Rs 166 lakh crore and to achieve this reliance has to do major changes in their products or launch a new product.

But when you have invested in a small company then it would be easy to grow your money 10× because the company is in a growing stage and you can easily multiply your money.

But remember more returns means more risk. Therefore do proper research before investing in a company. 

Rule No 4 -: Hold Fewer Stocks Than You Are Informed Of 

This rule states that the human mind can track only 8-15 stocks. Therefore don't invest in more than 15 Stocks. 

But those 15 stocks should be those in which you have done all the research and read annual reports and heard conference calls of that company and you are sure that these companies will grow in the future.

According to Warren Buffett, an average person needs 3 good companies to grow their investments.

Rule No 5 -: If You Like The Product Then Chances Are You Will Love The Stock

Peter Lynch visited the body soap showroom with her daughter and realized that the showroom was full of customers and everyone was buying their products.

So the next day he read all the financial reports of the company and concluded that this company is opening stores worldwide very fast and expanding its business.

Therefore Peter Lynch immediately invested in that company and that company earned huge profits and Peter Lynch's investment got multiplied.

Rule 6 -: Trying To Time The Market

Peter Lynch says that they don't know when the market will rise or when the market will crash but their job is investing and they have to pretend to everyone that they know when the market will fall or when the market will crash.

But their main focus is on business because if their business will grow then their investments invested in the business will definitely grow and they don't time the market.

Therefore do not try to time the market.