7 Key Rules To Building A Bulletproof Investment Portfolio

This an article for investors at the entry to intermediate levels about how to build a solid stock investing portfolio. The idea is to give you principles and concepts so you can learn how to do the work, not have me tell you which stocks to buy and sell, which is not the right way to educate. 

Look, building a solid stock portfolio is going to be filled with failure, that is normal and should prepare to fall on your face a few times before you get it right. Having said that, here are a few strategies that will hopefully minimize the amount of your faceplants along the way. 

1. Rule number one is simple. Understand how to the stock market works. 

In the words of Warren Buffett, "Risk comes from not knowing what you're doing." Simple as that. What does it mean exactly? 

Imagine that you and 4 of your friends decide to start a pizza shop. To fund the venture, each of you contributes $1000, totaling an initial investment of $5000. Therefore, each of you owns 20% of the company. In terms of stocks, the pizza shop has 5000 shares (1 share = $1 of initial investment), and each of you owns 1000 shares. If the pizza shop becomes successful and its value doubles from $5,000 to $10,000, your 1000 shares would now be worth $2000 and you just made $1000 of profit or 100% on your investment. 

This is EXACTLY how stocks work. 

When you buy a share of stock, you're buying a piece of the business not a piece of paper! The value of your stock shares fluctuates based on the company's performance, market perception, and broader economic conditions. Fundamentals matter, short term hype not as much. Owning stocks allows you to benefit from a company's success, not to try and speculate how a price of a share might move up or down within a few days or weeks. 

That is called trading, and I don't teach that here. I teach long term fundamentals based investing through discipline and following a process. 

2. Rule number two. Establishing your Investment Goals

Peter Lynch once said: "Know what you own, and know why you own it." 

Before you deploy a single dollar, define your investment objectives. Failure to plan is planning to fail, remember that. Here is a good example of what I mean. 

Let's consider two investors - Pete and Tom. Pete, 25, has just started his career and is looking to grow his wealth over the next 40 years. His main investment goal is long-term growth. Therefore, he might choose to invest in high-growth companies, tech startups, or index funds that provide a balanced exposure to the market's growth potential. 

Tom's old ass, on the other hand, is 55 and nearing retirement. His main investment goal is safety. He needs investments that provide regular dividends or interest payments that he can use to cover his living expenses during retirement. Therefore, he might choose to stay away from growth and speculative stocks and instead invest in solid companies with a history of paying reliable dividends, or in bonds that pay regular interest. 

3. Rule number three. Diversify

You know the old saying "Don’t put all your eggs in one basket" - keep that on your mind. Diversifying your portfolio by investing in various stocks from different industries, geographical areas, and market capitalization levels is a good strategy to reduce risk.

Let's consider an investor who deploys 100% of his capital into growth technology stocks in 1999, all of a sudden the dot-com bubble on 2000 comes along. Every single technology company crashes and most go bankrupt. Had our investor diversified his portfolio to include stocks from different sectors, bonds, dividends, or real estate, he would have been better protected from the losses in the technology sector during the crash. 

Crashes and collapses will happen out of the blue and you never know which part of the market they will destroy, so you better have a balanced and diversified portfolio so you don't lose your pants if that happens to you. 

4. Rule number 4. Continuous Learning and Market Research

The stock market is ever-evolving and you have to stay on top of it. Doing ongoing research and market analysis is like going to the gym for investors. Knowledge, after all, is power and if you don't use it, you lose it. 

Consider the rise of electric vehicles in recent years. Investors like Dave Lee or Steven Mark Ryan who recognized the potential of EVs early on and conducted thorough research decided to invest in Tesla before it became popular and as a result became millionaires. 

You don't need to spend 10 hours a day staring at CNBC but reading and staying up to date with technology and finance is a must for any investor. 

5. Rule number 5. Embracing Patience

The story of Ronald Read, a janitor and gas station attendant, is an excellent example of the power of patience in investing. 

Over several decades, he quietly built a portfolio of blue-chip stocks, never selling and always reinvesting his dividends. When he passed away at the age of 92, he left behind an $8 million fortune.

One of the defining characteristics of successful investors is patience. Warren Buffett has often stated, "The stock market is a device for transferring money from the impatient to the patient." 

Building a solid stock portfolio is not a sprint; it's a marathon. Remember that!

6. Rule number 6. Investing in What You Believe In

Sir John Templeton started his investment career with a belief in global investment diversification before it was a widespread practice. 

In 1939, he bought shares in every public company listed on the NYSE that was trading for less than $1 per share (104 companies in total, 34 of which were in bankruptcy) and profited greatly when the market rebounded. 

Templeton AND NOT BUFFETT was actually the mcDaddy of the famous qoute: "To buy when others are despondently selling and to sell when others are avidly buying requires the greatest of courage."

If you genuinely believe in a company's mission, ethos, and potential, it may be a worthy addition to your portfolio.

A perfect example of this can be found in the story of Ron Wayne, one of Apple's co-founders. In 1976, Wayne sold his 10% stake in Apple for a mere $800. Today, that stake would be worth over $100 billion!

The lesson here is to understand the potential of your investments and hold onto them if you truly believe in their value. If you have conviction you buy when its low and feel good about it. There is 0 panic or pressure and you sleep much better at night. 

7. Rule number 7. Balancing Risk and Reward

Legendary investor Benjamin Graham once said: "The intelligent investor is a realist who sells to optimists and buys from pessimists." 

This approach requires you to buy undervalued stocks and sell overvalued ones. It's a principle that has guided many successful investors over the years.

An excellent example of balancing risk and reward comes from Warren Buffett's investment in Goldman Sachs during the 2008 financial crisis. 

As financial institutions were collapsing and the stock market was plummeting, Buffett saw an opportunity. He invested $5 billion in Goldman Sachs, a move seen by many as bat shit crazy at the time! 

However, his understanding of the bank's underlying value compared to its market price allowed him to reap significant rewards when the market recovered.

Hope this helps you get started and don't hesitate to post your questions below. There are NO bad questions, so fire away!