Greg Evans’ eight key principles for making money when investing

1. One’s reference point for evaluating risk should be loss of purchasing power.
It is important to understand that all assets have risk. The short-term security of CDs and money market funds may not be appropriate for long-term financial goals after accounting for taxes and inflation. It is very important to look at investments that may protect, and potentially increase, your purchasing power. This often leads one to the stock market. Please remember, however, that unlike CDs, investment securities will fluctuate in market value, do not offer a fixed rate of return and do not offer insurance. In addition, past performance does not guarantee future results.

2. Mr. Market is manic-depressive.
Some days the market seems to say, “I’ll sell my interests for much less than what you think they are worth.” On other days it seems to say, “I’ll buy your interests for much more than you think they are worth.” It is up to you to consider the offer and decide whether to buy, sell or do nothing at all.

3. Think of yourself as the owner of a business.
When you make an investment in the stock market, you are not investing in a piece of paper. You are investing in a business. Good businesses may do well over time, but will experience some bumps along the way. Only in portfolio management does each little fluctuation in commercial circumstance seem to trigger an urge to buy or sell the business investment. It is my belief that not a single American fortune would have been made if the business owners sold out each time conditions deteriorated, with an eye toward getting back in when the outlook appeared to improve.

4. Temperament is more important than intellect.
The most important quality for an investor is temperament, not intellect. The ability to think for yourself, to not be swayed by the crowd and to have the patience to allow the intrinsic value of the business in which you have invested to potentially be realized are all critical traits in achieving success.

5. Stay out of the prediction business.
Don’t fall into the trap of trying to predict the future. What will the gross domestic product be? Where are interest rates headed? What is the stock market going to do? None of this can be predicted accurately. Instead, it takes away from the business at hand – attempting to invest in good companies at great prices.

6. The future is never clear.
Peter Lynch has said he believes over half of the people who invested in the Magellan fund when he was manager lost money. In a fund that earned almost 20% annually, how is that possible? Probably because people tend to buy when the outlook is good and stock prices are high, and tend to sell when the outlook is bad and stock prices are low. As an investor, it is important to remember that the future is rarely clear and you pay a high price for a cheery consensus.

7. The psychological comfort of moving with the crowd works against you.
By nature, investors tend to fall into a pattern of buying what is favored at the time. Psychologists use the term “social proof” – what we see others do and approve of is what we believe we should do and approve. If we see others buying something, we think it is better. We feel comfortable being in the mainstream.

Every crowd has a leader and, in investing, the leader is price. Think of how you feel when you buy a stock at $20, which then rises to $23. You feel rewarded. If the price keeps rising, you feel elated and smart. Conversely, if the stock goes down to $17, you feel punished. If it continues going down you feel angry and foolish for buying the stock in the first place. These emotional highs and lows often match the natural up and down pattern of the market and may motivate you to make decisions based on fear and greed. However, knowing the value of a business can help overcome the tendency to buy based on emotion.

When I analyze a business I am interested in, I know at what price I want to buy the stock and at what price I want to sell it. If the stock initially goes down, I’m still comfortable. I take advantage of the opportunity to buy more of a good business at a lower price knowing I may make that much more on my investment if the true value of this company is realized in the market.

It is only human nature to be afraid to invest when hearing stories of failure. It is also human nature to throw caution to the wind when you are hearing stories of easy profits. So we end up buying into optimism at high prices and selling into pessimism at low prices.

8. Volatility is the investor’s friend, but the markets are usually dull and plodding.
Do not let the volatility of the markets scare you away from investing in equities. Equities should be part of nearly every investor’s long-term strategy to strive toward keeping up with, or possibly outpacing, inflation.

From 1925 through 2002, figures from Ibbotson Associates show that $1 invested in stocks in 1925 would have been worth $1,775 by 2002. However, if an investor was out of the market the best 35 months during that time, that investor's return would have been only $16.07! Similarly from 1982 through 2002, $1 invested in 1982 would have been worth $10.94 at the end of 2002. If an investor was out of the market on the best 16 months out of that 20 year period, he or she would have only $2.79. Volatility is the nature of the beast. When markets are volatile, we should be attempting to buy low and sell high.

*Please keep in mind, there is no assurance this trend will continue. Past performance does not guarantee future results. The market value of securities fluctuates, and you may incur a profit or a loss. Transaction costs and tax considerations are not included in the performance noted.