Kevin O”Leary is a successful Canadian businessman who Co-founded O’Leary Funds and Softkey, and is famously known as one of the formidable sharks in the television series Shark Tank. In this blog, I’ll be sharing Kevin O’Leary’s 5 Rules of Investing.
Rule number 1: Have Diversity
Kevin O’Leary states “ Diversification is the only free lunch in investing.” In other words, Kevin urges people to invest in a variety of stocks, do not invest all your money into one single stock. Specifically, he suggests to invest 5% max into a stock for your portfolio, and never let any stock exceed 5% in your portfolio; if any stock exceeds 5%, sell into the strength. Kevin warns people to never exceed 20% in a specific sector; instead, invest in multiple sectors from financial to energy and maintain good sectoral diversification.
Rule number 2: Never Spend the Principal, only the Interest.
When people make investments in stocks, there will always be the possibility that their investment could be lost, it will go to zero. To counter this, Kevin suggests to have a sort of backup plan that earns some cash, so if everything blows up, your still fine. One of the biggest mistakes is to blow all your capital. Instead, leave aside a portion of your cash and don’t touch wait. In this case, Kevin advises to only spend the interest, never the principal(original amount of money put into an investment.
Rule number 3: Buy Gold
Kevin advises everyone to follow his first rule when buying gold: only buy 5% max. When buying gold, you should check on it quarterly to see if it exceeded the 5% threshold. If you have over 5%, you should sell into its strengths; likewise, if you have below 5%, you should buy into its weakness. Remember, gold is a stabilizer. You should always keep it at 5%.
Rule number 4: Focus on the Cash Flow
When investing in stocks, the most important thing is to focus on the free cash flow. Focus on companies that can continue to generate incremental cash flow. The man point is that you should focus on the company's ability to generate cash. This type of investing technique is for the long haul.
Rule number 5: Keep it Simple
Kevin says that the simple deals are the ones you can make money on. Therefore, invest in simple deals where you can easily understand the business models.
Written and Researched by Steven Gao