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Three Principles of Successful Investing

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Benjamin Graham is known as the father of Value Investing and the guru of Warren Buffett. Benjamin Graham through his life and work alluded to three fundamental principles that define successful investing. These principles are a Decoction of his whole work but is also fairly simple to follow for each of us :

Principle 1 : Invest Assets with a margin of safety

While investing it always makes sense to look for opportunities that are not apparent but are there which offer a discount to the actual value of the asset your are investing in. Esp. in assets like Equity this is a useful advice to follow as asset prices always revert to their mean, which means that as long as the fundamentals are strong, the asset price which one bought at a discount, will revert to its realistic price thus generating profits for the investor. On the other hand since one is already investing in a discount, it is unlikely to significantly go down further. This means investors need to learn to start looking closely at what the markets are currently not favoring and therein look for the hidden gems.

Principle 2 : Use Volatility to earn Profits

The average investor will pull out his equity investments when the market goes down. The smart investor will look at buying opportunities every time the markets fall. So the idea is to train the mind to look at volatility as friend and not a foe. Therefore how to gain the advantage from volatility through investing regularly when markets are low or using rebalancing of assets to enhance the investments into the assets that provide a value buy.

Principle 3 : Be aware of your investment persona

Each one of us is very different in our outlook, thoughts , experiences, needs & many others. Therefore our investment persona will also be very different. So it is important to introspect and understand one’s investment persona and be grounded to that. That is the only way to find peace in investing. For example if one is an investor who is risk averse, irrespective of the allure of stock markets he should stick to Fixed deposits and bonds and not go near stocks or mutual funds. If a 20 % drop in your portfolio value does not perturb you then equity markets are not a bad place for you. But if you get sleepless due to drop, then you need to figure out other means of investing, Stock markets are not for you. Understanding one’s persona and staying true to it will bring harmony and peace to oneself and result in superior investment experience over the lifetime.

Do reflect on these three principles for a superior investment experience.

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