The 100 things I’ve learnt in investing – Part 3


If you missed part 1 or part 2, why don’t you check them out first? – Its ok, I’ll wait.  The lessons I’ve learnt are in no particular order, so feel free to read this article, and then check out the others, Oh and watch out for part 4 coming soon! Following are my lessons 51 to 75.

Number 51. Index ETFs may be the most wildly misused products in the stock market. They are excellent tools for ultra-low-cost buy-and-hold diversification, but many use them to day-trade the market (and sectors thereof).

52. Somewhere around 80% of actively managed funds (as opposed to broad index funds) don’t beat the market.

53. The more we learn about investing, the more we want to start doing exotic things (naked straddle options, anyone?) and buying stock in obscure companies no one has heard of. Maybe it’s boredom, maybe arrogance, or maybe the desire to impress people at parties. Or perhaps it’s seeking the glory of being right when few saw it coming. I’m guilty as charged on all counts. When I’m at risk of going off the deep end, I try to remember that stock picking isn’t diving. As Buffett has noted, there are no extra points (or returns) for degree of difficulty.

54. This Einstein maxim is spot-on for stock analysis: “Everything should be made as simple as possible, but no simpler.” Both clauses are crucial.

55. Just because a company or industry is set to change the world doesn’t mean it’s a great investment. Beyond looking at valuation, there tends to be a Wild West of players until a few winners emerge. In fact, market beater Ralph Wanger says, “Since the Industrial Revolution began, going downstream — investing in businesses that will benefit from new technology rather than investing in the technology companies themselves — has often been the smarter strategy.”

56. Jumping from one flavour of the day to the next isn’t continuous learning.

57. Long-tail events (a.k.a. black swans) are highly underrated. Nassim Nicholas Taleb explains it best in his book, Fooled by Randomness.

58. Every time I start getting cocky (which is often), I am unceremoniously reminded there are no sure-thing stock picks. As master investor T. Rowe Price noted: “No one can see ahead three years, let alone five or ten. Competition, new inventions — all kinds of things — can change the situation in twelve months.”

59. I personally get way too excited when a stock hits its 52-week lows or falls 50%. Many sins are washed away in my mind when I see a bargain, but price movement by itself is not a sufficient reason to buy (or sell). Falling knives can be death — especially when they’re rusty and gross. BlueScope Steel Limited (ASX: BSL), Arrium Limited (ASX: ARI) (ex-OneSteel), Gunns Limited (ASX: GNS) and PaperlinX Ltd (ASX: PPX) come to mind.

60. A related point: No one consistently times the bottom or top of a stock’s price (let alone the market of stocks!).

61. Don’t let the false modesty of investing greats fool you into false confidence.

62. My three strikes against gold. Strike one: Its value can’t be estimated with basic math (since it just sits around producing nothing). Strike two: Wharton professor Jeremy Siegel showed that going back to the 1800s, the return on gold has barely kept up with inflation and is left in the dust by stocks and bonds. Strike three: Gold as a doomsday investment doesn’t make much sense. If the apocalypse (financial or otherwise) actually comes, you’re probably stuffed regardless.

63. Discount cash on a company’s balance sheet. Managements are brilliant at squandering it.

64. Done properly, value investing — e.g., focusing on low-P/E, low-P/B, low-TEV/EBITDA stocks for ideas — has proven to work quite well. But as successful growth-investor Bill O’Neil warns, “What seems too high and risky to the majority generally goes higher, and what seems low and cheap generally goes lower.”

65. You may be too smart to be rich.

66. Know thyself. Know your weaknesses and strengths. Here’s a specific example from Joel Greenblatt: “For most people, stocks should represent a portion of their investment portfolio because I still believe that over the long term they will provide superior returns relative to most alternative investments. However, whether that portion of an investment portfolio devoted to stock investments should be 40% of an investor’s portfolio or 80% is a very individual decision. How much are you willing (or able) to lose before you panic out? There’s no sense investing such a large portion of your assets in a long-term strategy if you can’t take the pain when your chosen strategy doesn’t work out for a period of years.”

67. For some help on getting to know yourself, study the common mistakes behaviour finance experts have uncovered.

68. People say that “success has many fathers, while failure is an orphan.” Combine that with our willingness to overvalue streaks owing to one event, and I start to wonder: Do we overvalue managers that leave a successful organization to turn around a woeful organization?

69. If you just heard of the company yesterday, don’t buy its stock today.

70. The Internet and better regulations have largely eliminated data advantages. The problem now is isolating which data is actually meaningful. Better results stem from increasing the signal-to-noise ratio.

71. Even if you rely on advice from others, heed the words of bond fund legend Bill Gross: “Finding the best person or the best organization to invest your money is one of the most important financial decisions you’ll ever make.” As with stocks, familiarity alone isn’t protection.

72. Stuff that leads to suckerdom: greed, laziness, unearned trust, ignorance, and shortcuts. When in doubt financially, do the opposite of your favorite athlete.

73. Make sure to get the right odds. There should be a vast difference between what we pay for a has-been or never-was and what we pay for a potential superstar company. As George Soros puts it, “It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong.”

74. Initial valuation matters, but generally, over longer periods of time (decades, not years), stocks have returned more than bonds. The more decades you have left, the more of your portfolio should be in stocks to stave off inflation.

75. In theory, well-timed share buybacks are better than dividends. They save on taxes and allow the people who know the company best to buy up shares when the market acts crazy. In practice, I’ll take dividends. (A tangential bonus fact: Dividend stocks have historically beaten non-dividend stocks).

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Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned. The Motley Fool‘s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

A version of this article, originally written by Anand Chokkavelu appeared on fool.com. It has been updated by Mike King.

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