Investing Basics

Banish Bias… Erase Emotion
The Gambler: When people bet on sports, they often lean towards their favorite teams or let nostalgia play a part in their decisions.

The Investor: Don’t fall in love with a stock just because you like the company’s products or your Aunt Rose gave you the shares on your 15th birthday. Those emotional investment decisions shouldn’t even factor into whether to own a stock.

Don’t Follow the Crowd
The Gambler: Looking for “easy money,” gamblers latch onto what the crowd is doing and money then piles towards a particular favorite. But just because something/someone is favored doesn’t necessarily mean it’s a sure shot to win.

The Investor: Same thing with stocks. Sometimes, a rumor or hot tip will cause money to flow towards an investment. And more often than not, the crowd blindly follows.

But the crowd is often wrong about certain stocks and trends and you’re usually better off going against the consensus. Remember, by the time a stock or trend is considered “hot,” there’s probably more risk than reward left in the opportunity. Go with out-of-favor stocks that have huge upside and limited downside.

Don’t Over-Extend Yourself
The Gambler: Gamblers often bet more than they can afford to lose.

The Investor: Avoid this trap by position-sizing (that means investing similar amounts in your positions) and diversifying. And no matter what you’re buying, never invest more than you can afford to lose, or invest so much money that you’ll lose sleep at night.

Don’t Get Greedy… Take Profits
The Gambler: Often, a gambler riding a hot streak will get greedy or cocky and up the ante on his bets, rather than taking profits.

The Investor: Recognize the importance of locking in gains now and again. As my colleague Karim Rahemtulla warned a couple of weeks ago, don’t get greedy when it comes to selling your investments. The reason you invest is to make money, so once you make it, take it!

Cap Your Risk
The Gambler: Needless to say, gamblers don’t usually exercise enough risk management. When they bet, too much is put on the line.

The Investor: If you pay too much attention to profit potential at the expense of adequate risk management, you’re setting yourself up for failure.

(adapted from Investment U)