Fundamental Principles of Investing That Can Save Your Cash – And Life Too

Investing is no battle for the brave; it is one for the prepared. These principles can save you from a lot of stress and preserve your funds.

There is a way I believe non-investors see the world of investment. They see it as a war against foes that has been passed from one generation to another where men have died fighting for their lives and their family incomes. A situation where many have fallen and only few have survived to tell the story.

If this is how you see investment – as a road that leads to hell with only few making heaven – then your mind-set needs a little fixing. Investing is a process. This process is guided by rules and strategies that if employed can put you far above your peers forever.

Here are some of those stock trading principles that can change your life.

Have An Investing Strategy

This is the first rule of investing. Have an investing plan. One reason people lose money is because the foundation upon which their investment was based is flawed. We might all want to make money but if you don’t have a career path or plan to achieve it, you’re wishing.

It also helps to know the kind of investor that you are. Are you an active investor or a passive one? If you are active, you must have an understanding of your investment. In which case you can continue reading the rest of this post.

If you’re passive, you might jump the gun and and simply invest in mutual funds or an index and collect whatever you get. Whatever it is, have a plan and stick to it.

Invest In A Business/Industry You Understand

One reason people lose in the investing game is that they do not have one clue about the industry they’re investing in. For example, some stocks move with seasonality. If you do not have an understanding of this, you would panic at every single price movement and ultimately end up losing money that you could have just waited out on.

Peter Lynch’s quote helps put this in perspective. He said "Never invest in an idea you can't illustrate with a crayon." You have to be able to know and understand your investment so it helps that you remain within your realm of competence.

Understand Intrinsic Value And The Need For A Margin Of Safety

Also known as fundamental value, the intrinsic value of a stock is the value of the stock based on fundamental analysis without reference to its market value. In essence, it is what your stock is really worth. In the long run, a stock's price generally matches the intrinsic value of a company.

A great way to determine and correctly estimate a company's intrinsic value is by analyzing its price-to-earnings ratio. You can also find it by knowing its book value (assets minus liabilities.) The reason you have to go through all of this stress is because knowing the intrinsic value will help you determine the margin of safety.

The difference between a stock's intrinsic value and its current market price is called the margin of safety and if you want to ensure that you never lose out on an investment, you have to find stocks with a good margin of safety and a lot of potential.

Diversification Is Key

The difference between somebody who wakes up one day and has lost everything from an investment and another who has lost just a percentage is diversification. This is why we have a platform to view your portfolio on Yochaa.

When you spread your investments across various stocks in various industries or even various securities, not only will you be able to offset losses of an investment with another, you also have a lot of buffer when something really wrong takes place in one industry.

Leverage Compounding

Compounding is the ultimate means of building and sustaining wealth. The idea of compounding is that when you reinvest dividends on the same stock you generate exponentially more returns on the asset or stock!

This is what makes your initial investment grow and what gives you an edge above the dudes who invest just to have spare cash for beer with the guys.

Naira-Cost Averaging Helps

This concept is one of the simplest, yet smartest method to employ while investing. When you invest the same amount of money periodically, say every month, you spread out your purchase price of stocks across periods. The essence of this is that you reduce the impact of volatility on large purchases of financial assets.

Invest for the future

Warren Buffet said, “The stock market is a device for transferring money from the impatient to the patient.” Investing for the long term is the ultimate investment strategy. Wait out the chaos! Investing for the future will save you from the stress of short term panic.

Now, this doesn’t mean you sleep on your investment. No way. The truth is that no stock is safe forever so you cannot afford to buy and hold forever. This is where monitoring your investment and the market comes in handy.

Some of these concepts will be explained in detail in other posts. In all of these things, do not panic. In fact, except volatility and be ready for it. Be ready to take advantage of investment opportunities. Most importantly, know that Yochaa has your back.

Written by Lawretta Egba.