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Top 10 rules for investing

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21 Sep 2012

In a world where everything is seemingly costly, we all want to make more money, invest in stock markets, buy homes and save enough for retirement.

Going against the herd can be very profitable, especially for patient buyers who raise cash from frothy markets and reinvest it when sentiment is darkest.

Those who already own homes may choose to invest in the residential buy-to-let market or invest in listed property funds or other investment vehicles.

However, if you one of those who chooses to invest in listed property, there are 400 companies listed on the Johannesburg Stock Exchange (JSE), 42 of these are listed property companies which account for 3.4 percent share of the JSE.

Listed property companies own properties including shopping malls, office buildings, industrial properties and hospitality in some cases.

But before you invest, it is essential to understand the market – this would include reading financial literature (newspapers and magazines) and speaking to financial experts for additional advice, according to the JSE.

The JSE points out that investors should only invest the money that they can afford to live without for a long period, five years for example to enable the investment to grow.

Click here to read about buying commercial and listed property.

It is also important to remember that taking control of your money is key to savings and investing.

According to Prieur du Plessis, non-executive chairman of Grindrod Asset Management there is gain to be had from investing, however, investors need to be savvy and understand what they are buying and in some cases, selling.

The company manages assets valued at over R10 billion.

For those looking to start investing in some companies listed on the JSE, Du Plessis has rules to help you make the most of your investment.

10 rules for investing

1. Markets tend to return to the mean over time

When stocks go too far in one direction, they come back. Euphoria and pessimism can cloud people’s heads. It’s easy to get caught up in the heat of the moment and lose perspective.

2. Excesses in one direction will lead to an excess in the opposite direction
Think of the market baseline as attached to a rubber string. Any action too far in one direction not only brings you back to the baseline, but leads to an overshoot in the opposite direction.

3. There are no new eras – excesses are never permanent
Whatever the latest hot sector is, it eventually overheats, mean reverts, and then overshoots.

As the fever builds, a chorus of “this time it’s different” will be heard, even if those exact words are never used. And of course, it – human nature – is never different.

4. Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways

Regardless of how hot a sector is, don’t expect a plateau to work off the excesses.

Profits are locked in by selling, and that invariably leads to a significant correction eventually.

5. The public buys the most at the top and the least at the bottom
That’s why contrarian-minded investors can make good money if they follow the sentiment indicators and have good timing.

Watch Investors Intelligence (measuring the mood of more than 100 investment newsletter writers) and the American Association of Individual Investors Survey.

Broad momentum is hard to stop. Watch for when momentum channels into a small number of stocks.

6. Fear and greed are stronger than long-term resolve
Investors can be their own worst enemy, particularly when emotions take hold.

Gains “make us exuberant - they enhance well-being and promote optimism”, says Santa Clara University finance professor Meir Statman.

His studies of investor behaviour show that “losses bring sadness, disgust, fear, regret.

Fear increases the sense of risk and some react by shunning stocks.”

7. Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names

This is why breadth and volume are so important. Think of it as strength in numbers.

Broad momentum is hard to stop. Watch for when momentum channels into a small number of stocks.

8. Bear markets have three stages

These are sharp down, reflexive rebound and a drawn-out
fundamental downtrend

9. When all the experts and forecasts agree – something else is going to happen

As Sam Stovall, the S&P investment strategist, puts it: “If everybody’s optimistic, who is left to buy? If everybody’s pessimistic, who’s left to sell?”

Going against the herd can be very profitable, especially for patient buyers who raise cash from frothy markets and reinvest it when sentiment is darkest.

10. Bull markets are more fun than bear markets

This is especially if you are long only or mandated to be fully invested.

Those with more flexible charters might squeak out a smile or two here and there.

The JSE emphasises the point that investors should only invest the money they are prepared to lose, taking into account that unexpected happenings in the economy or in a particular listed company may result in share prices suddenly increasing or decreasing.

Although financial advice from a stockbroker for example is a very important tool in investing, the final investment decision lies with the investor, according to the JSE. –Denise Mhlanga

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