As regular readers will know, we have a soft spot for legendary value investor Benjamin Graham, author of The Intelligent Investor, which that other legendary value investor Warren Buffett describes as ‘by far the best book on investing ever written’.

In the book’s introduction, Graham says his objective is ‘to guide the reader against the areas of possible substantial error’, including the psychological pitfalls of investing, ‘for indeed the investor’s chief problem – and even his worst enemy – is likely to be himself’.

If we are going to expose ourselves to ‘the excitements and temptations’ of the stock market, then even those of us with extensive knowledge of finance need to develop the calm temperament needed to invest successfully.

Investing isn’t easy, otherwise we would all be millionaires, but it can be made simpler. There are many books on investment psychology – or its modern cousin, ‘behavioural investing’ – but they all have a common thread.

The list of suggestions in this article are a good starting point, particularly for first-time investors still getting to grips with how markets behave. Most of us know what we should do, but emotion tends to get the better of us.

Several of the suggestions are sourced from books we have previously reviewed, such as here and here. For those who want to delve deeper into the sociological and psychological tendencies which impact on investing The Behavioural Investor by Daniel Crosby is also worth studying.

Six simple rules for successful investing:

1. Best ideas only

If you’re investing in individual company shares, only invest in your very best ideas. Quite often investors spread their money across hundreds of different stocks which is too many to manage and you might be better off simply buying a tracker fund. However, if you have a high level of conviction in a particular stock, avoid the temptation to go all in.

Bad luck happens, so spreading your investments evenly can avoid the risk of one big idea going horribly wrong and sinking your whole portfolio.

With luck you will have more winners than losers, some of which may be big winners. The trick is to keep your losers smaller and fewer. Warren Buffett has one over-riding rule when it comes to investing: don’t lose money.

2. Be hands-off

Given the eye-catching gyrations of the stock market, it’s easy for investors to feel the need to tinker with their holdings. They should take a leaf out of the handbook of asset manager Fundsmith: find good companies, don’t overpay, and do nothing.

Don’t check your portfolio every day: if you are genuinely investing for the long term, look once a month or even once quarter and don’t get sucked into lots of buying and selling because you feel you ought to be doing something.

3. Stick to your guns

There’s no way to reliably time the market, and there will be periods when your stocks have setbacks. This is when emotional detachment counts. Don’t get shaken out of your convictions if the strategy that worked for you six months ago isn’t working now. Compounding and big gains only come with patience.

4. Set alerts

Having said not to trade for the sake of it and to stick with your convictions, if there is a material change in the fortunes or the outlook for one of your holdings you need to review it.

Every investor makes mistakes: the trick is recognising them and writing them down, so you don’t repeat them.

Set an alert if the share price falls to 20% below the price you paid, and the alert being triggered is the reason to review your original investment case.

If the outlook hasn’t changed for the worse it could be an excellent time to add to your position, but if your reason for buying in the first place no longer stacks up cut the idea and move on. 

5. Cut early

Chasing losses is a fool’s errand. If you lose 20% on a stock, it needs to rebound by 25% just for you to get back to break even. However, short-term losses can get bigger with time.

If your 20% loss turns into a 50% loss, the stock needs to double for you to get back to break even. The recovery could happen, but the odds are extremely low. As the old market saying goes, the first cut is the cheapest.

Also, hanging onto loss-making investments isn’t the trait of a good investor, it’s stubbornness.

6. Run your winners

While it’s very tempting – and indeed satisfying – to book profits on your winners, the most successful investors let their positions run with the aim of winning big.

If you absolutely have to take profits, sell some but not all of your shares and don’t set yourself a price target to sell    the rest.

Early investors who doubled their money and sold out of stocks such as Amazon or UK equipment hire firm Ashtead (AHT) could have made 100 times their money had they stayed invested.
A £10,000 investment in either stock would have generated life-changing gains.

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