Investment Adventures in Emerging Markets

Investment Rules for the New Year

Happy Holidays!

Many of you have asked for pointers on how to invest. Making or preserving money in capital markets is not an easy task, especially in these volatile times. It requires a lot of research, hard work and most important of all, discipline. I hope that you can start your investing year off on a good foot, and so I’d like to share with you a few investment rules I’ve picked up over the years.

1. Diversification. I think that your best strategy to plan against unexpected events such as earthquakes, political upheaval, floods, investor panic and the like, is diversification – not only within a particular market, but also across markets globally. You never want to be overly dependent on the fate of any one stock or security, particularly if you don’t have control over a company’s management or events. Some successful investors with a limited number of holdings believe in the school of thought “put all your eggs in one basket – but watch that basket carefully”. But these investors often have some influence on companies and management. Most investors are not able to do that, and if you fall into the latter category, you may be better off diversifying across countries and companies.

2. Don’t be afraid of risk. Without risk, I believe it is difficult for your portfolio to aim to achieve superior investment returns. But that risk-taking is not the same as playing roulette or skydiving. The assumption of risk I’m talking about must be carefully planned and researched. Having said that, investment decisions always require decisions based on insufficient information. There is never enough time to learn all there is to know about an investment, as equity investments are undergoing continuous change. There comes a time when a decision must be taken and a risk acquired. The ability to take just the right amount of risk based on the most diligently researched available information, in my mind, is the mark of a good investor.

3. Make volatility your friend. Markets are volatile, like a combustible material. You can warm up gasoline until a certain point, after which it ignites and explodes. But these market explosions give us an opportunity to buy low and sell high, as long as you have been wearing protective gear (such as diversification). The extreme sensitivity of markets to any news, what I call their “manic-depressive” nature, means that they often rise and fall by much more than they should. Remember that the time of maximum pessimism is the best time to buy and the point of maximum optimism is the best time to sell. If you can look beyond the emotional rollercoaster of the volatility and use it to your advantage, you might be able do rather well on your investments.

4. Take a long-term view even if you desire short-term rewards. If you take a long-term view of the world and the markets, you are likely to (a) be less emotional and thus less likely to make costly mistakes, (b) see beyond the short-term volatility of the market, and (c) take a step back to see broader patterns of market, political and economic behavior that may not be evident to a short-term observer.

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