Shares will be running a series of Christmas features explaining the top 10 golden rules of investment


Rule number 7: Do not over trade

This is related to rule number three, but over-trading is not just about minimising frictional costs which greatly add up over time. It is also about the risk of paying too much for an equity or selling it badly – in other words buying at the top and panicking out at the bottom.

In his 2013 letter to his own shareholders Warren Buffett writes: ‘The main danger is that the timid or beginning investor will enter the market at a time of extreme exuberance and then become disillusioned when paper losses occur … The antidote to that kind of mistiming is for an investor to accumulate shares over a long period and never to sell when the news is bad and stocks are well off their highs.’

The trick here is to block out the noise, as Buffett explains: ‘Owners of stocks, however, too often let the capricious and often irrational behaviour of their fellow owners cause them to behave irrationally as well. Because there is so much chatter about markets, the economy, interest rates, price behaviour of stocks, etc., some investors believe it is important to listen to pundits – and, worse yet, important to consider acting upon their comments.’

Cover Top 10


Rule number 8: Go against the herd

The first Baron Rothschild, Nathan Mayer Rothschild, always advised to ‘buy on the sound of cannons, sell on the sound of trumpets’. Meanwhile, one of Warren Buffett’s most famous quotes is: ‘Be fearful when others are greedy and greedy when others are fearful.’

Both maxims are closely related to Benjamin Graham’s statement: ‘Price is what you pay. Value is what you get.’ The general principle is that successful investors should not get carried away with the euphoria of a bull market and buy stocks at the top, but instead keep their discipline and see market sell-offs as an opportunity to purchase good-quality companies at a reasonable price or even cheaply in the event of an outright panic.

Cannon fire

Issue Date: 31 Dec 2014