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3 Simple Steps to Better Investing

I define better investing as making more money, more often. The more consistently I see profit from my investments, regardless of market conditions, the better my process has become.

Better investing implies that you've already started see the results of your investing process and you want to improve. You can't get better until you've started, and you'll need a solid starting point to measure your gains. And by solid starting point, I mean a repeatable decision-making process.

You did start off with a process right?

If not, no worries. You don't have to spend the next ten years developing one from scratch. This site is set up around one that I created, so feel free to use it yourself.

Flow Chart of the Safe Investing Process

How to Start Investing - The Process

Once you're using a process consistently (whether it is the process above or your own), you're ready to move towards "better investing".

3 Simple Steps to Better Investing

Use these three steps to evaluate your the results of your process and you WILL make more money.
  1. Capital Preservation
    2.
    • Don't lose the money you have
  2. Consistent Returns
    3.
    • Create profits consistently using the money you have
  3. Superior Profit
    4.
    • Create profit from your profits

That's it. Apply these three steps, and I guarantee better investing performance. And yes, it really is that simple. The hard part is sticking to it.

Step 1: Limit Risk With Capital Preservation

Picture of a Safe The first step is capital preservation. In order to keep the money you have, you need to limit the risk of loss. So before you start imagining all the money you can make, take a hard look at how much money you can lose. This step is focused on improving the first two steps of the process (stabilizing your finances and planning your investments)

You limit the risk of loss (and thereby preserve capital) using position sizing.

To summarize, position sizing will tell you how much money to invest, based on how much money you are willing to lose before you decide an investment is no good.

Through position sizing, you make it possible to continually invest, regardless of how many mistakes you make. This is the key to capital preservation.

I can't stress enough the importance of capital preservation. It is one of the first things you should think about in the "Planning" phase of your investing process.

Three of the 10 principles of safe investing (#2, #7, and #10) directly relate to capital preservation.

Even principle #3 is indirectly related (3 = The only "good" investments are the ones that you sell for a profit) because until you sell, all investments have the potential to lose money.

Want more proof that capital preservation is important? Let's see what successful investors have to say.

Warren Buffett once quoted two rules for investing:

    Rule #1: Never lose money
    Rule #2: Never forget Rule #1
 Still not convinced?

Paul Tudor Jones, founder of Tudor Investment Corporation and #336 on Forbes Magazine's Richest person in the world, had this to say about capital preservation:

"I’m always thinking about losing money as opposed to making money.
Don’t focus on making money; focus on protecting what you have."

Step 2: Create Consistent Returns

Staircase with an up arrow

Once you've limited risk, you're ready to focus on repeatability. This step usually impacts the trading and monitoring phases of your process.

Consistent returns come in many forms. The key here is to buy and sell in a disciplined way.

From a personal finance perspective, consistency may come in the form of an automated, monthly deposit into one of your accounts.

You could target a 20% capital gain for each stock you buy, at which point you ALWAYS sell half your shares (a growth investing strategy).

Or you could purchase a stock that is considered a "dividend king" because it has increased it's dividend every year for 50 years (an income investing strategy). Consistent returns create stability in your personal finances, which makes financial planning and budgeting so much easier.

Step 3: Generate Superior Profits

Briefcase full of money The third and final step towards better investing is where it all comes together; earning profit with your profit.

In step 2, you created a consistent returns from your investments. Step 3 takes those returns and re-invests them.

For example, let's say you achieved the 20% growth goal and sold half of your position. Now what?

  • You could take the profit and buy a new stock, looking for another 20% return
  • You could take the profit and buy a new stock, looking for another stream of dividend income

Or, maybe you've got some dividend income that needs to be invested.

  • You could reinvest your dividends in the same stock (similar to dollar cost averaging)
  • You could take your dividends and buy shares of a growth stock, looking for a 20% return

Some Final Thoughts on Better Investing

Whatever path you choose, reaching that third step is uber important. It's the step that creates compound returns in your trading and investment accounts; it's the step that makes people rich.

How you go about creating compound returns is up to you. I know some people that like to use their profits to go after investments with higher volatility and greater profit potential. The bulk of their money preserved is safe, invested for consistent returns and limited risk.

Notice I didn't say they like to go after "high risk" investments. This is because risk is determined by your position size, not by the investment you choose (see capital preservation).