Golden Rules of Value Investing

These rules are a mix from many sources that I have picked up, of course Graham's teachings are present.

(1) Only invest in shares what you can genuinely afford to lose. the chances of losing everything are miniscule if you invest sensibly, yet you must be able to say to yourself "If all shares collapsed tomorrow, although distraught, would I be able to get by?" if a yes, you may invest.

(2) Never under any conditions borrow money to invest. This probably means you are disobeying rule 1 anyway as you cannot lose much if you have to borrow to invest in the first place. This includes all forms of leveraged accounts- where you trade with more than your principle- you should never put yourself in a position where you can potentially lose more than the money you invested.

(3) Diversify. BP if nothing else has taught a very good lesson- even big companies have an element of risk. Diversification ensures that in the event that a shares price collapses due to unforseeable events, you are not exposed only to this share. When we see a brilliant investment, we naturally want to put as much money into it as possible- instead put as much research in as possible to find several great investments and diversify your capital over them.
  Furthermore diversification between shares and bonds further reduces your exposure to adverse developents, especially the bomb proof gilts.

(4) Compound Interest. If you are holding a stock for any length of time, re-invest the dividends. If you hald a stock yielding 7%, even if the price didnt move over 5 years (highly unlikely), dividend reinvestment would have given you a gain of 40%.
Barclays Equity Gilt Study shows which that £100 invested at the end of World War II would have been worth just £5,721 at the end of 2008 without reinvestment, but with gross dividends reinvested it would have grown to £92,460.

(5) Know Yourself. How do you react when the market drops? Ironically you should be happier- share prices have dropped and there are more undervalued shares to be found. Would you invest after a stock market collapse? Would you buy shares if the media is telling you about a companies incredible prospects even if it is trading on a P/E of 50? If you want to profit from value investing you have to have complete control over your instincts- it seems madness to buy the boring shares no-one really wants and to scorn those "stocks of the future" yet it is absolutely imperitive.

I cannot do justice to Graham's book- "The Intelligent Investor" Buying that book was and will continue to be the best invesment of my entire life. I strongly advise you to do the same.