How to diversify your portfolio to protect yourself from market risks? (17/20)

Here are these principles (this list is not intended to be exhaustive):

1) Buying a stock is like shopping: you compare quality and price. You take advantage of sales and don't buy when the price is at its highest (I'm deliberately antagonizing all technical analysis enthusiasts here).

2) A contrarian approach. This is related to the first point. We ignore the group effect, a phenomenon well known to psychologists, and very much in evidence on the stock market. It feeds on our fears and greed. It's easy to say, but not easy to do, at least not for everyone (which explains the market's erratic behavior). If you can do it, then you're way ahead of the game. Buffet and Dreman are very good at this game.

3) We play for the long term. The market is focused on the short term. It reacts very strongly to the latest news, especially when it doesn't match forecasts. Fund managers need to achieve convincing results over a very short timeframe. They therefore tend to rotate their positions a lot. The market is an average in which there are a lot of loser stocks, which languish or disappear, but also a few nuggets that have been around for a very long time. So you need to bet on these exceptional stocks for the long term. It doesn't matter if they lose 30% during a downturn, if the share price continues to gain several tens of percent a year for several decades. The problem is that most people only hold their shares for a few years. Likewise, there's no need to monitor your stocks every day. It's counter-productive and leads to bad decisions based on emotion. By doing a quarterly or even annual check-up, you behave like a real investor or company director. Better still, you don't focus on the price, but on the company's financial results.

4) Focus on a "reasonable" portfolio size: large enough not to lose everything if you make a mistake, but small enough to be free of the market (the more stocks you own, the closer you are to the market). By linking this point to the previous one, we behave like a true investor, almost to the extreme like an entrepreneur, in the manner of Buffet or Bill Gates. It's neither possible nor necessarily desirable to do what they do, but you can use them as a source of inspiration. A few large, high-quality portfolio fund shares, with consistent earnings over many years, no matter what's happening in the market, and which you hold not for years, but for decades. Focus on companies with a "franchise", i.e. a competitive advantage, a quasi-monopoly, or a very strong brand. Focus on consumer goods sectors. How many positions in total? That depends on individual risk appetite, but somewhere between 20 and 50. Beyond that, there's no point in reducing risk. For investment funds, it's in the hundreds... no wonder they don't do better than the market. They are the market!

5) You create your own method, i.e. don't follow tips or recipes made by others, financial gurus, because everyone else is already copying them. You can adopt a "value" strategy, like Graham, but create valuation criteria that suit you, according to your personality, your risk appetite, your investment horizon, your means, etc. The more a strategy suits you, the more it will be profitable for you. The more a strategy suits you, the more likely it is that you'll stick with it, even in the event of a wrong turn. Above all, the more it suits you, the less likely it is that others will do the same. And that's the only way you can beat the market, maybe not today, maybe not tomorrow, but over the long term. The market has not only loser stocks, but also loser investors or traders, who give up along the way. If you stay the course because your strategy suits you, then you've already won. You'll notice that I'm not giving you ready-made formulas here, just pointers to get you thinking, so that you can develop your own method.

6) We're looking for increasing dividends. This is linked to point 3 above. Don't jump on the first stock that pays a big dividend, as this is often a sign of weakness (but sometimes it's just Mr. Market being picky...). Avoid companies that pay no dividends, or pay them at irregular intervals. Instead, look for companies that have been paying an increasing dividend for several decades. This is proof that they are well managed and that, whatever happens, they always manage to generate added value.

7) Don't try to beat the market. Paradoxically, it's by focusing on your own strategy and staying the course, without worrying too much about the outcome, that you stand the best chance of beating the market.