Simple Investing Works Best

The longer I invest, the more I realize that simple investing works best. The fewer rules you have, the better.

Simple investing should be a natural outgrowth of having more knowledge and a better understanding of how investing works. Your ability to pick out what’s truly important and what works for you is key.

The worst thing you can do is try to have a well-rounded knowledge of the market. I know that sounds odd – but by trying to be well-rounded, you won’t develop mastery in any part of the market. At best, you’ll know a little about how the market operates in any particular segment.

How to simplify?

1. Adopt a favorite industry – preferably one that you already know a lot about. At most, follow two industries.
2. Determine the three most important things you want to see in a company before you invest in it. It could have to do with growth, margins, cash flow, value (maybe price-to-earnings), spending, or dozens of other things. For Warren Buffett, for example, it’s a history of earnings growth, low costs, and an unglamorous business line. What is it for you?
3. Use a straightforward formula for when you get into and out of an investment – and stick to it. (Maybe buying only when the stock has bottomed and is going up, and selling when the stock has fallen 20 percent from its peak.)

Three rules. That’s all you need.

[Ed. Note: ETR Investment Director Andrew Gordon has turned his attention to the energy sector. He’s put together an urgent special report with two of the world’s best (not the biggest, but the best) drilling companies that you can still buy on the cheap. Learn the details here.]