Mar 28, 2008

Motley Fool's 12 Tenets of Value Stock Investing

#1. Rule No. 1: Don't lose money.
Rule No. 2: Don't forget Rule No. 1.

Don't be satisfied to let a few stocks in your portfolio lose a lot of money while one hits a home run.

#2. Be an investor, not a speculator. Too many investors jump on the momentum bandwagon and chase stocks just because the price is going up. Most believe they can get out before the stock price crashes — but very few do/can do!

#3. Price is what you pay; value is what you get. Valuation always matters. Learn how to value companies.

#4. Buy with a margin of safety. Estimates of value depend on a wide variety of inputs and are never hard and fast. Buying stocks at a significant discount to valuation estimates provides a margin of safety.

5. Stop trying to predict the direction of the market. Timing the market is a futile exercise that no one has consistently mastered. On the other hand if your investment thesis is right, the market will eventually come around.

#6. Patience is a key element of success. Don't chase a stock with a price above your margin of safety; wait for it to come down. Once you buy, wait for the market to realize a stock's value — weeks, months, or even years later.

#7. Never invest in a business you can't understand. The simpler the investment thesis, the better. Stay within your circle of competence.

#8. Invest for absolute returns. Beating the market index is a laudable aim, but there's no prize for breaking even when the market is down 5%. The aim is to increase portfolio value over the long term.

#9. Be fearful when others are greedy and greedy when others are fearful. Don't let the market psych you out of a good investment. Most investors swear off stocks when the market declines and greedily buy in when it's up. To be successful, be contrarian.

#10. Watch the business, not the stock. Checking quotes every day won't improve your chances of success. Instead, watch the business fundamentals and management's actions — those are the real drivers of value creation.

#11. Know when to sell. It's generally best to buy and hold for the long term, but you should sell if you have a better investment for your money, if your investment thesis was wrong, or if you simply need the cash.

#12. Have fun with investing. There are far more important things in life than investing, which is only a means to an end.