Stock Investing Basics: Chapter 1 -- Axioms

Chapter 1
Axioms

In mathematics and logic, we are introduced to the term “axiom” which is nothing more than a starting point from which we will begin to formulate theories and draw conclusions. There is no logical “proof” that these axioms are “correct;” in other words, their truths are taken for granted.

Of course, these are my axioms and are subject to debate. But stay with me for a few minutes.

AXIOM #1
Never invest money in an investment vehicle (stock, bond, or hard asset like gold or silver) that you cannot afford to lose.

Invest as if you will never see that money again. Sure, you're investing your money, hoping that it will grow over time. But investments rise and fall, and if you need the money tomorrow, next month, or even in the next five years, either don't invest it or call it a speculation.

AXIOM #2
Stocks and bonds can be investments. Futures and options are speculations. You will lose your money in speculations just as easily as you do in Vegas. The “house” always wins, over time. Of course, you can win, and win BIG, on occasion, but you'll find, over time, the your losses outpace your gains. Factor in commissions and taxes, and these speculations nearly always result in net losses for you, “the little guy.”

AXIOM #3
Invest early. Compounding your dividends and/or interest, tax free in many cases, is a huge advantage that you'll want to leverage. The sooner you begin investing, the sooner you'll reap the benefits. Wouldn't it be better to begin investing at 5 and attain your goal of $1 million (or whatever) at 35 than to wait until you're 35 and attain that goal at 65? Plus, $1 million will be far worth less at 35 than when you turn 65.

In other words, you'll need $2 or $3 million at 65 to have the equivalent amount of money at $1 million at 35.

AXIOM #4
Invest often. Dollar cost averaging works. In effect, you're putting the investing maxim, “Buy low and sell high,” to work in a systematic fashion – if you invest a set amount each and every month in a mutual fund, for example, you'll be buying more when stocks have fallen in price and you'll be buying less when stock prices rise.

AXIOM #5
Take advantage of employer-sponsored savings plans like 401k or 403b. Max the match (more later). It's free money so take it!

AXIOM #6
Don't be greedy. Establish limits, especially with stocks, that set prices where you'll sell (do the same on the buy side). In doing your research, you'll come up with an upper price valuation where, once reached, the stock you've purchased will have become fully valued. Any rise after that, and you're being greedy (or, you've underestimated the stock's fundamentals, but more often than not, the price will fall precipitously and you'll be back to square one).

AXIOM #7
Don't put all of your eggs in one basket. OR, if you do, watch the basket!

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