6 Key Rules for Investing in Stocks

1. Never lose money (and never forget this rule)

Warren Buffett: "Rule No.1: Never lose money. Rule No.2: Never forget Rule No.1."

Prioritize capital preservation. Buy with a margin of safety, avoid excessive risk, and exit when fundamentals change. Permanent losses are much harder to recover from than missing short-term gains.

2. Invest only in what you understand

Stay within your "circle of competence." Avoid businesses or industries you can't explain simply. This reduces costly mistakes from hype or complexity.

3. Buy quality businesses at reasonable (or bargain) prices

Seek companies with strong competitive advantages ("economic moats"), consistent earnings, good management, and solid returns on capital — but only when priced attractively (low P/E, high earnings yield, etc.). Avoid overpaying for growth or buying poor businesses just because they're cheap.

4. Diversify, but don't over-diversify

Spread risk across different stocks, sectors, and asset classes. A portfolio of 15–30 well-researched stocks often works well for active investors. Too much diversification dilutes returns; too little increases danger from any single failure.

5. Think long-term and be patient

Ignore daily noise and short-term volatility. Quality investments compound over years or decades. View downturns as buying opportunities rather than reasons to panic.

6. Have a plan, manage risk, and control emotions

Define your goals, risk tolerance, and strategy upfront. Rebalance occasionally, minimize fees and taxes, and avoid emotional decisions driven by fear or greed. Discipline beats intelligence in investing.