The fundamentals of successful investing

As a result, they will sometimes overreact or make decisions that run counter to their instincts and their best interests.

The starting point for successful investing is self-discipline. And to achieve that, you must have a well-defined set of standards from which to work.

Here are my seven basic principles for investing success.

Principle One: Establish an objective. What are your investing goals? Growth? Income? Tax advantages? Some combination? You must be clear in your mind what you wish to achieve or you cannot choose the proper securities for your needs.

Principle Two: Keep things simple. Don’t run before you can walk. If you do, you’re almost sure to fall flat on your face.

      Frequently when I’m a guest on a telephone hot line show I’ll get a call from someone who says something like: “I don’t know a lot about investing and I’ve just bought some shares in Moose Pasture United Mutual Fund. What can you tell me about it?”

      Forgive my bluntness, but what a stupid question to ask! The caller has just bought a diamond in a Cairo bazaar and now wants to know if ‘s real!

      There’s a golden rule when it comes to investing: IF YOU DON’T UNDERSTAND IT, DON’T PUT YOUR MONEY INTO IT! It’s so basic, yet it’s violated all the time – often by people who would never dream of spending a few hundred dollars on a new appliance without investigating it thoroughly and satisfying themselves they were getting the best possible deal.

Making an investment is like buying something. It’s strictly caveat emptor – let the buyer beware. There aren’t as many high-pressure sales types in the business as there used to be, but there are still some around. Don’t give in to them.

      Principle Three: Start small. Don’t get in over your head before you know what you’re doing. When you’re ready to begin investing, pick something that doesn’t require a large cash outlay and get a feel for the process. A great many people decided they wanted to plunge into high-tech stocks in late 1999 and early 2000 when Nasdaq was going through the roof. They were swept up in the excitement of the moment and invested far more money than they could afford. When Nasdaq tanked in the spring, many lost heavily. If they’d started small, they would have escaped relatively unscathed.

      We’ll look at the remaining four principles next month.

Adapted from the book 6 Steps to $1 Million by Gordon Pape, published by Prentice Hall Canada. To order a copy: