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Rules Of Long-term Investment. Part 1

Let us read one more selection of rules. This time they are devoted to long-term investment that it is the most interesting to us. My comment is applied on each rule.

In spite of the fact that in the share market there are no rules warranting the constant income, there are some principles with which it is difficult to argue. We represent rules which will help you to invest most effectively savings on long time intervals. Each point represents the fundamental concept which to each investor should be known at least, and to use them or not it is the personal business.

1. Sell losers and allow winners to move further

Again and again investors fix profit, selling well evolved shares, but thus hold on hands the fallen papers in hope of correction. If the investor doesn’t know, when it is necessary to sell hopeless shares, he can wait their complete depreciation. However, the idea to hold successful papers and to sell bad ones is fine in the theory, but is difficult in realization in practice. However, the following information can help you:

- The well-known investor Peter Lynch has somehow thought up the term tenbaggers – the shares which have grown ten times from the moment of purchasing. Its principle is a careful choice of a small number of shares which will show the maximum growth. If you adhere to a rule to sell papers after they will grow in certain number of times after purchasing (for example, three times) you necessarily drop ?rally of winners? and won’t get profit from those papers that will continue to grow further. If you want to learn more about Lynch’s Peter principles, read his books.

- There are no guarantees that shares after falling will return to that level on which you bought them. It is important not to underestimate the share, but also it is important not to overestimate them. Process of recognition of “losers” among papers is much combined, because it means acknowledgement of the errors. But it is the extremely important, if you don’t want to lose money constantly.

Anyway, papers should be estimated, proceeding from their real qualities and according to your researches. In each situation you should make the decision on equitable price of the share in the future, proceeding from its potential. Also remember that it is impossible to allow fear to limit your profit or to inflate losses.

All is fine, but there is a serious danger to be fond of purchasings-sales and to start to “miss” constantly: to buy leaders who have already won back and to sell shares which are going to grow. Eventually, it is possible to fall down in trading that it is unacceptable for us. In general, to this rule I would advise to concern rather carefully. And Lynch’s book is useful for reading, of course.

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