"Portfolio Management is neither art nor science. It is instead a special problem of determining the most reliable and efficient way to reach a goal, given a set of policy constraints, and working within a remarkably uncertain, probabilistic, always changing world of partial information and misinformation all filtered through the inexact prism of human interpretation." Charles Ellis or “the Dean of Portfolio Management” (1993)
"Never ask anyone for their opinion, forecast or recommendation. Just ask them what they have- or don't have in their portfolio." Nassim Taleb (2013)
1. Know about your risk but do not be afraid of uncertainty
Use capital which doesn't affect your solvency. Know what you can lose and be able to lose the amount. The core to become wealthy is to avoid losing money when everybody else is going belly up. "An investor who earns 16% over a decade, for example will perhaps surprisingly, end up with more money than an investor who earns 20% a year for nine years and then loses 15% the tenth year." (Klarman, Margin of Safety)
2. Human Capital
A further point to consider is the nature of your
human capital and income. Human capital provides a hedge against inflation and is decreasing with age. Think about investments to increase your human capital and invest in extreme chances. For
example startups before 30 are more or less call options with limited downside risk.
When Warren lectures at business schools, he says, “I could improve your ultimate financial welfare by giving you a ticket with only 20 slots in it so that you had 20 punches—representing all the investments that you got to make in a lifetime. And once you’d punched through the card, you couldn’t make any more investments at all.”
3. Diversification/Asset allocation
Even Mohnish Pabrai changed his view on diversification 5-30 assets seem to be right. You want some downside protection but no standard market over diversification. Risk vs uncertainty (unknown possible return see below) is an important factor to consider.
4. Convex payoffs
Convex payoffs with limited downside allow you to make money. This is not just true in financial markets but also in real life.
Take a look at the common psychological errors and try to avoid them, by making yourself rational and introduce a controlling system for yourself. http://faculty.som.yale.edu/nicholasbarberis/ch18_6.pdf
The strategy you use should have a fit with your knowledge and time you are able to effort.
7. Fundamental data
For any investment, be curious about the financial figures. Force yourself to calculate and to do valuation. The only thing that many value investors have in common is a philosophy that dictates the purchase of securities at a discount from underlying value.
8. The market
Do not become a sheep following the noise, filter the information "rational". If you decide to follow trends or bubbles do it rational too. This is called momentum strategy (investment horizon up to six months) on the other hand, in the long run reverse to the mean can occur. For long term investments it is still better to focus of fundamentals of non-efficient markets. Ask yourself, how efficient is the market I am investing into? Do I have a good change with my specific knowledge to outperform the market or is it better to go long or short in the market itself? "A good company isn't a good investment."