Three Rules of Investing

By creating a plan, staying consistent, and diversifying your portfolio, you too can start building wealth and achieving your financial goals. Let's take a closer look at the three basic rules of investing and how they can help you on your journey towards financial freedom.

Ronald James Read was an American philanthropist, investor, janitor, and gas station attendant. Read grew up in Dummerston, Vermont, in an impoverished farming household. When he died in 2014, he had amassed a fortune of almost $8 000 000 or R 86 000 000 (USD/ZAR R 10.84) over his lifetime. For those who knew Ronald Read, there wasn’t much worth mentioning, his life was about as low key as they come. (The Psychology of Money, Morgan Housel)

How did this janitor accumulate such a fortune, and if he could do it what is stopping you? 

What if I told you he did nothing special, there was no lottery win, no inheritance, and no big pay check. 

He followed the 3 basic rules of investing: 

1. Create a plan: 

Although Read was a blue collar guy he had blue chip smarts. Read bought many shares but focused on blue chip companies such as Johnson & Johnson, Procter and Gamble, JPMorgan Chase and General Electric that had prolific growth between 1981 and 2001. 

He focused on companies that paid generous dividends, which he would reinvest into purchasing additional stock. He did not invest in technology companies or the “stock of the day" because he concentrated largely on companies he knew about.

2. Stay Consistent: 

Those who knew Read were baffled. Where did he get all that money? It turned out there was no secret. Read saved what little he could and invested it. Then he waited, for decades on end, as tiny savings compounded into more than $8 million.

Besides being a good stock picker, he displayed remarkable frugality and patience—which gave him many years of compounded growth.

3. Diversify your portfolio: 

When he died, he had no fewer than 95 stocks that were diversified in many industries such as healthcare, telecommunications, public utilities, rail transport, banks, and consumer goods. 

Although he owned shares of Lehman Brothers when it went bankrupt in 2008, the bankruptcy minimally affected his returns because his investments were diversified.

Ninety-five different stocks might be too much for the average person to manage however the underlying principle doesn’t change, never put all your eggs in one basket. 

Read accumulated his fortune by following the basics, he created a plan, showed remarkable frugality and perseverance by consistently saving allowing him to benefit from compound growth and kept a diversified portfolio to ensure that even if he made a bad investment choice his portfolio would not suffer. 

Read showed us that by following the basics, you can achieve financial freedom.