The Four Unwritten Rules Governing the Science of Investing

Someone once said that rules were ‘made to be broken’. Whoever uttered that statement was and is not the only victim to a very common disease known as ‘indiscipline’. Millions of investors worldwide suffer from this disease too. They are said to suffer from the disease due to their urge to break the very basic rules that govern the science of investing. These basic rules have been around for as long as you and I can remember but unfortunately many of us have always been too busy to pay close attention. Well, we all know that a ‘two plus two’ will definitely yield a ‘four’ and not an ‘eight’.
Similarly investments, whatever the nature, depict certain characteristics which can grant us permission to apply certain rules in an effort to predict the outcome. Quite simply, whenever you invest, the principal aim is not to lose money but to make money. As such, you could expect these rules to be the type that will always guarantee a ‘touch of gold’ on your investment portfolio.  


A farmer cannot advise on banking!
The first indispensable rule of investing is, ‘Only borrow investment advice from experts in the particular field you wish to invest’. Flouting of this rule has culminated into the most common disease among investors, call it investors’ influenza. Blame it on the social settings in our world today, isn’t it obvious that our friends and relatives, regardless of their accomplishments, are our most sought after investment advisers? The failure to heed this rule has resulted into a breed of misinformed investors and quite undesirable the type that invest to lose money. 

You don’t invest to lose money
We couldn’t agree more that money will always be the score-card to whatever investment you partake. As such, the second rule of investing is, ‘Only invest where you can guarantee the safety of the principal amount invested.’ Well, you could argue that sometimes you’ve got to take on some risks. I call it gambling. Mind you, the seasoned investor does not place a wager on his principal sum. He calculates the risks involved and will only invest where the risks of loss of the principal sum are at the minimal. Failure to heed this rule has resulted into a killer disease among investors, call it investors’ cancer. It’s global, malignant and only by heeding the rule can you escape from its adverse effects.  

The deal has to bear fruit
Once the principal sum has been invested, it’s crucial that you get a return on the principal. Otherwise you would be offering out your hard earned cash for nothing! As such, the third rule of investing is, ‘Only invest where you can guarantee a fair return on investment.’ What is fair will depend on how soon you would need your money back as well as the return offered by the available alternative investment vehicles. For instance, a government bond in Uganda today promises a return of 10% risk free for, say two years. An alternative investment for the same time span should therefore surpass the 10% threshold given the potential risk exposure.

You’ve got to invest back the earnings
The fruit of your investment, considering adherence to the first three rules, will undoubtedly be abundant. The question however is, should you then pop the champagne corks? Your guess should be as good as mine. The fourth rule of investing is therefore, ‘Be prudent enough to invest back at least 10%.’ Failure to heed this rule is undoubtedly fatal (probably through a nasty slow death) given the various market forces that play against investors resulting in an erosion of the real worth of investments. On the bright side however, obedience to this rule enhances a compounding of the sums invested and hence leading to more earnings.  

Ultimately, it’s quite vivid that most of us in our different capacities as investors are either suffering from the above 'diseases' or, in the very least, there are symptoms indicating the verge of a full blown ailment. How then do we fight back against these ‘diseases’ and our different shortcomings as well as? Well, only three words can guarantee our survival, ‘Let’s Be disciplined!’

4 comments:

  1. Anonymous1:50:00 AM

    What a nice piece of advice...!!

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  2. Anonymous8:24:00 AM

    Nyce. Encouraging.

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