When it comes to good habits, I say the more the merrier.
Previously, we covered four good investment habits that you should adopt.
These were taken from the best-selling book “The Winning Investment Habits of Warren Buffett and George Soros” by Mark Tier.
Let’s turn to this book for four more nuggets of wisdom.
5. Diversification is for the birds
If an investor knows what he is truly doing, then diversification is not necessary.
By this, it means that he has the knowledge, expertise and capabilities to analyse and invest in great companies,
The problem with diversifying too much is that even if one investment performs well, it would have a negligible impact on the overall portfolio’s performance.
By focusing your capital on high-conviction ideas with low risk and good potential returns, you are thus able to optimise your portfolio.
6. Hates paying taxes
This factor is not a big issue in Singapore where capital gains and dividends are both not taxed but is a factor to consider if one is investing in overseas companies.
An example would be withholding taxes of 30% levied on dividends received from US companies.
An investor should, therefore, try his best to avoid paying unnecessary taxes to minimize his overall investment expenses.
7. Only invests in what he understands
A great investor would only invest in a company that he understands well.
A simple rule to follow in the stock market would be – if you do not understand it, avoid it.
Recall the case of the Lehman Brothers Minibonds which were sold by banks before the Global Financial Crisis.
Many investors bought these complex financial products without fully understanding what they were getting into and unfortunately, ended up losing their shirts when the once-vaunted investment bank collapsed.
8. Refuses to make investments that do not meet his criteria
Great investors are extremely disciplined when it comes to selecting investments.
They have a strict set of criteria that has to be met before they allow themselves to commit their capital.
Many investors make the mistake of easing up on their stock selection criteria because of either social pressure or because they do not have a proper investment selection system.
By refusing to invest unless all his criteria are met, the master investor ensures that he invests within his circle of competence and is aware of the risks and rewards that the investment brings.
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Disclaimer: Royston Yang does not own any of the companies mentioned.