5 Golden Principles in Investing

The principle we all know in belief systems is the ethic of reciprocity. This is commonly known as the golden rule: "Treat others as you would like to be treated." In the world of investments, this rule can be redefined as the expectation of getting returns that are equal to or greater than the risk we take.

Let's take an example to explain this better. If you invest $500 in a stock, you want to make sure that you not only get your initial investment back but also a significant profit. You have confidence in the stock's potential returns based on your research, so you expect that the returns will be equal to or greater than the investment.

The concept of "Do unto others" is only practiced when people expect reciprocity in return. This applies to both positive and negative actions. In the world of stock trading, why not apply the same principle? If you believe in a stock, invest in it, and expect returns in the future.

Enough with the philosophical discussion. This article is about the "golden principles" of investing. We use the golden rule to remind traders and investors to expect profits when they invest in quality stocks. The principles that follow will help achieve that goal.

Principle #1: Diversification

Investors should not be one-dimensional when building a portfolio. Some sectors perform better than others, and diversification helps minimize the risk of losses in one sector by spreading investments across multiple sectors.

The Global Industry Classification Standard (GICS) is a system of eleven primary categories recognized by major indexes such as the S&P and MSCI. These categories include:

1. Energy
2. Materials
3. Industrials
4. Consumer Discretionary
5. Consumer Staples
6. Health Care
7.  Financials
8. Information Technology
9. Telecommunication Services
10. Utilities
11. Real Estate

Professional analysts typically conduct deep dives into twenty-four industry groups, sixty-nine industries, and one hundred fifty-eight sub-industries. However, most investors stick to the eleven primary sectors.

It is crucial to consider all market sectors to succeed in the long term. Social movements, government changes, and market conditions affect all sectors, positively or negatively. To prepare for anything, diversify your portfolio.

Principle #2: Set Clear Financial Goals

Investors have a long-term view, and their goals are different from day traders who focus on executing several trades daily. Investment portfolio managers focus on three areas: Accumulation of Principle, Rate of Return, and Disbursement Strategies.

1.  Accumulation of Principle involves consistently building your portfolio, even during down markets when stock prices are low. Allocate a specific amount of money every week to your portfolio regardless of market conditions.
2.  Rate of Return could be a specific percentage or a comparison to market indexes. By monitoring return percentages, investors can decide when to reallocate their portfolio.
3.  Disbursement Strategies are important because investors ultimately want to withdraw their gains. Ideally, withdrawals should be lower than gain dollars, ensuring the portfolio keeps growing.

Investors should consider their life goals too. Money-making is a goal for everyone, but what are your specific goals? A new home, a comfortable retirement, or the ability to travel? Define your goals to stay motivated.

Principle #3: Risk Tolerance 

This principle applies to both investors and traders and encompasses various factors. Risk tolerance can refer to the amount of money you're willing to invest or how long you're willing to hold a position before selling. Setting goals in both these areas is critical to any investing or trading plan.

Firstly, it's important to consider the monetary value of your investments. Similar to advice given at a casino, don't invest money that you can't afford to lose, not because you're going to lose it, but because you cannot use that money elsewhere. Creating a budget can help you determine how much you can allocate towards investing, after covering living expenses, incidentals, and unexpected life occurrences.

Once you know how much you can afford to invest, evaluate your appetite for risk. Determine how much you're willing to lose or risk losing before pulling out of a trade or investment. This varies by individual and is influenced by life circumstances. To make informed investment decisions, learn to separate your emotions from stock trading. While there's an element of chance involved in the stock market, using tools like Tickeron to analyze trades and investments based on data and science can help you set goals that align with your risk tolerance levels.

Principle #4: Look for Undervalued Stocks 

Undervalued stocks are stocks that are selling at a price significantly lower than their intrinsic value. Their value is based on predictable future cash-flows, which can be assessed through additional research on the company. Tickeron can assist you in this process. While there's a huge potential upside to finding the right undervalued stocks, not all of them will turn out to be winners for you. Some may have a low valuation for a reason, such as excessive debt or inefficient management. Additionally, market conditions can also impact the price of a stock. It's important to seek expert advice in this area to make informed investment decisions.

One useful indicator of whether a company is undervalued or overvalued is the price-to-earnings (P/E) ratio, which compares a company's earnings to its share price. Generally, undervalued stocks tend to have lower P/E ratios, with the average P/E on the S&P being 15.

Principle #5: Respect Market Capitalization and Profit

When evaluating stock potential, price-to-earnings ratios aren't the only consideration. Investors must also respect market capitalization and profits. Market capitalization represents the cumulative value of all outstanding shares on the market, while profits indicate the company's ability to pay off debt. Investors can calculate the debt-to-income ratio themselves from company financial reports, but market cap and P/E ratios are generally sufficient to make informed investment decisions.

When it comes to market capitalization, the significance of a share's price can be limited if the number of shares available for trading is restricted. This is particularly evident in an IPO (initial public offering), where the share price is predetermined before trading begins, and only a limited number of shares are sold.

For established companies, a higher market capitalization is typically observed. For instance, let's take eBay as an example. Currently, eBay's share price is $50.68, and its market capitalization is $35.47 billion. The trading volume is 6.343 million, which indicates that the company has a strong presence in the market.

A more in-depth analysis of eBay shows a P/E ratio of 7.85, and according to Tickeron, the probability of an uptrend is 73%. This presents a strong buy signal. As an investor, eBay seems like a good investment opportunity for me, given that it aligns with my risk tolerance and has the potential for long-term growth.

Patterns and Consistency Lead to Investing Success 

Tickeron focuses primarily on providing insights for traders. Consistently following a trading plan is crucial for them, as neglecting it can lead to significant losses during the market's active hours. This harsh reality is well understood by traders.

On the other hand, investors operate with longer time horizons. Therefore, it may not be immediately evident whether a plan is effective or not. It is advisable to adhere to the plan until sufficient data is available for analysis. If necessary, modifications can be made at that point. Meanwhile, implementing these essential principles can increase your likelihood of success.

Tickeron's Products

The main idea behind technical analysis is the ability to find recurring price patterns and trends and use them to predict the direction of future market trends. We started with the creation of AI-based Engines (Pattern Search Engine, Real-Time Patterns, Trend Prediction Engine) that allow us to effectively analyze market trends.  We then have explored almost all existing methods (price patterns, trend indicators, oscillators, and many others) using neural networks and deep historical backtests. As a result, it was possible to form a pool of trading algorithms that together allow our AI Robots to effectively determine the key points of change in market trends.

Contributor

Sergey Savastiouk|Expert

Sergey Savastiouk, Ph.D. has a degree in Applied Mathematics from Moscow University and has extensive experience as an entrepreneur, investor, manager, and mathematician. His professional expertise is in applied mathematics, mathematical modeling, system and pattern analysis, and software and hardware system integration. He has served as the CEO of several hi-tech start-up companies and nonprofit organizations, which has given him proven capabilities in business strategy for high-tech start-up companies, market assessment, company formation, team building, product development, marketing, and sales. He has published numerous articles in journals and magazines on related fields. As a retail investor, he spent 15 years developing his proprietary trading and quantitative algorithms (now Tickeron’s A.I.), which brought him significant returns in trading the stock market. His current work and goal in founding Tickeron is to bring professional, sophisticated stock market analysis capabilities to retail investors via an easy-to-use interface.

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