Think of investing as a sport or game. You have competitors and competing interests. There are different strategies to “winning.” You have laws, regulations and rules everyone must play by, yet there are always a few cheaters looking to get an edge.
If you plan on being competitive and not losing all your money, it is important you develop your own set of rules to investing. These rules will serve as basic principles for your investing philosophy, thereby providing you guidelines on the types of stocks and companies to buy, when to divest shares, how to view market volatility, etc.
Bulls and Bears Make Money, Sheep Get Slaughtered
If you are new to investing, a “Bull” refers to an optimistic investor who believes the stock market will go higher while a “Bear” believes that share prices will fall. This rule refers to the fact that, like all business endeavors, earning a higher return than the market average requires splitting from the herd and making unique investment choices.
Generally speaking, when markets fall, institutional or professional investors are the first to get out, leaving retail investors to catch the falling knife. Then when the tide is turning, stocks have bottomed and sentiment is on the cusp of turning positive again, institutional investors again are the first to scoop up shares at a discount, allowing them to earn outsized returns and beat the market.
Don’t Worry About Taxes, Worry About Losses
It’s always interesting when people claim not to engage in a profitable endeavor because the taxes they will end up paying. The simple question is – are you not going to earn $1,000 in capital gains because you may end up paying $200 in long-term capital gains taxes? That’s ridiculous. Earn the $800 in net proceeds, pay your $200 in taxes, and say “Thank you very much.”
Instead of worrying about taxes, you should be concerned about losing money. While losses can lower your taxable income, unless you’re wealthy and need a tax-loss harvesting strategy, don’t lose money. Ever. Period.
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