Before I get into what we have learned, I have learned we were picked for the FeedSpot top 100 trading blogs at position 103. I guess we are in the top 103. You can find the page at:
Let us break down what we have learned this week:
- It is important to be debt free and have three to six months of expenses set aside in an emergency fund. I have not talked much about debt yet, but by debt I am referring to unsecured debt, not your mortgage or car payment. Your emergency fund should be in a bank (or similar) savings account, separate from the account you pay your bills from. This sounds like an insurmountable goal but is possible over time. Having an emergency fund prevents you from needing to cash in shares of stock for a real emergency.
- You are ultimately responsible for your success in investing. Blaming Jim Cramer or Robert T. Kiyosaki (Rich Dad) will not do you any good. I say this because nobody can control what you do except for you.
- We learned that when the market seems overbought, it is a good idea to raise cash. This is the situation we find ourselves in now. My recommendation is to hold 30% cash in your brokerage account for when the market takes another downturn. Holding cash reduces volatility and potentially investment returns, but it is better to be ready to buy at the right time.
- We learned about the efficient market theory and why it is obviously wrong. I say this because an investor can buy at market prices that are significantly less or more than calculated value at any given time. It is important to know this theory though and why some people trade the way they do.
- We learned about the various vehicles (accounts) available for saving and investing. We learned that some are tax protected and that employer sponsored accounts tend to restrict what you can invest in.
- We learned that a focus investor picks only 10 or 15 individual companies to invest in. 10 is a better number. A small number of stocks tend to perform better, especially because you are able to keep up with the information on a small number of stocks. I did not cover this in detail this week but it was mentioned.
- We learned about the idea of diversification and why you should avoid intentionally diversifying. Instead, pick the best companies within their business models based on their financials. This will often lead to unintentionally diversifying.
- We learned about how to value a company using discounted present value. We also learned some rules of thumb to look for in the financials of a company to buy. The calculated value only gives us a price to buy the stock at or under. The rules of thumb point us to good companies that we may want to buy.
If you have any questions, please feel free to comment.