If you're a long-term sharemarket investor, the most important rule to remember is: don't lose money.
What it means is, whilst there's no way to completely avoid a loss, if you lose money on an investment you'll likely spend years just trying to make it back.
If legendary investors like Benjamin Graham and Warren Buffett have taught us anything, it's to find great businesses, invest for the long term and avoid overpaying for the stocks.
Sure, it's great to buy big dividend stocks, but an investor should never compromise their selection process for reasons such as falling interest rates, a lower dollar, or simply a lack of other ideas.
Here in Australia, on the ASX, many stocks are overvalued and could be at risk of significant falls during the next correction due to the recent run-up in share prices. Westpac Banking Corp (ASX: WBC) is a popular stock which springs to mind.
It's expected to pay a big fully franked dividend this year, which is nice, but it lacks any serious growth potential. In my opinion, paying over $37.50 for Westpac shares today leaves investors with no margin of safety.
Whilst low interest rates are likely to be with us for 2015 and 2016, the sharemarket will be here forever. If you're rushing to buy a stock because you think you'll 'miss it', you're probably making a mistake – after all, it's not about timing the market but time in the market that counts.
Medibank Private Ltd (ASX: MPL) is another which is at risk of serious falls because of its expensive share price. It'll also fall if it misses cost-cutting expectations or endures an adverse investment experience (insurance companies can invest their 'float' for profit, making them a lot of money in the good times – but it works both ways).
At today's prices, investors must be willing to pay over 26 times last year's profits for Medibank shares, with limited growth and a number of ways to lose, it's definitely one for the watchlist only.
Finally stocks can look cheap for many different reasons. That's why the best investors read through annual reports, industry reports and research papers to understand the business before they buy it.
Currently all iron ore miners look cheap. Even the king of low production costs, Rio Tinto Limited (ASX: RIO) is sporting a big dividend yield and low valuation. At first glance everything looks great.
However iron ore is currently in a nosedive and producers are falling over like dominos. Whilst Rio itself probably won't go bust, given its incredibly low breakeven price, its next few years are likely to be a real test.
Look no further than fellow iron ore miner, Fortescue Metals Group Limited (ASX: FMG), which earlier this week cut its dividend from 10 cents per share to just three cents per share following an enormous profit downgrade.
