If you missed the first three articles, don't worry, they are in no particular order, so feel free to read part 1, part 2 and part 3 at your leisure, and in any order you desire. In this, the fourth and final instalment in the series, we look at the last 25 lessons.
Number 76. Some of the most misinterpreted words in investing: Peter Lynch's "Buy what you know." It's more like "Research what you know and then consider buying."
77. Don't be an Enron baby. Overweighting your investments in the company you work for is a double-down bet we don't need to be taking.
78. There are many paths to the top of the investing mountain, but some are more fraught with peril — and there are very few trailblazers.
79. Numbers frequently lie — especially in isolation. Say you spot a P/E ratio of eight. Sounds darn cheap! But is that industry's profitability rapidly deteriorating? Was there a one-time item that temporarily juiced the bottom line? Is an upstart competitor hungrily eyeing its lunch? Are new regulations threatening its livelihood? Is it a cyclical industry? Is it in a country that has a really poor reputation for accounting fraud or government interference? You get the idea.
80. Mergers and acquisitions are overrated. Somewhere between 50% and 85% of mergers fail to boost value. The frequency of achieving promised "synergies" should be filed somewhere between unicorns and the bunyip. It may be interesting to see what synergies DuluxGroup Limited (ASX: DLX) can obtain if, and when it manages to finally takeover Alesco Corporation Limited (ASX: ALS).
81. It's hard to be an independent thinker when the pressures to conform are daily and good investment theses can look ugly for years before paying off. Ben Graham said it this way: "Even the intelligent investor is likely to need considerable willpower to keep from following the crowd." Famed investor John Templeton talked of his defence against crowd-following: "When asked about living and working in the Bahamas during his management of the Templeton Group, Templeton replied, 'I've found my results for investment clients were far better here than when I had my office in 30 Rockefeller Plaza. When you're in Manhattan, it's much more difficult to go opposite the crowd.'" The digital equivalent today is turning off real-time news and Internet feeds and reading more thoughtful analysis.
82. The best book I've ever read on the basics of stock picking: Joel Greenblatt's The Little Book That Still Beats the Market. It's literally written so that a small child can understand it. It also does a great job of explaining why return on capital is a measure to pay attention to. Which may make shareholders in Hills Holdings Ltd (ASX: HIL) and Macquarie Group Limited (ASX: MQG) take a closer look.
83. It's not the rewards you don't understand that'll burn you, but the risks you don't understand.
84. The guy who invented the P/E ratio (James Slater) on small caps: "Most leading brokers cannot spare the time and money to research smaller stocks. You are therefore more likely to find a bargain in this relatively under-exploited area of the stock market." Of course, because there is less interest and less analyst coverage, doing your own due diligence is that much more important.
85. If you can learn quickly from your own mistakes, you're ahead of the game. If you can learn quickly from others' mistakes, you've won the game.
86. Jim Sinegal of Costco on why you can't pay too much attention to the big end of town: "You have to recognise — and I don't mean this in an acrimonious sense — that the people in that business are trying to make money between now and next Thursday. We're trying to build a company that's going to be here 50 and 60 years from now."
87. If it seems too good to be true…
88. Buffett's concept of the "circle of competence" is important: "There are all kinds of businesses that I don't understand, but that doesn't cause me to stay up at night. It just means I go on to the next one, and that's what the individual investor should do." Also consider Steve Jobs' quote: "Focus is about saying no." For a great book on saying no, read Seth Godin's tiny book The Dip.
89. The stock moves I've made based solely on the advice of others — e.g., "He's a good energy analyst and he loves this oil stock," or "This famous stock picker is buying X!" — have generally been disasters. Matrix Composites and Engineering (ASX: MCE) comes to mind.
90. If you can read a dissenting opinion without resorting to an ad hominem attack, you're at an advantage.
91. Downer alert: We like control, but we can't control everything. Life and luck can (and will) trump investment plans. You can do everything right and still die penniless. All we can do is give ourselves a better chance to succeed.
92. That said, if you're reading this article, there's a good chance the genetic lottery has smiled favourably upon you.
93. Here's something to think about the next time you get antsy to buy immediately into the latest must-act-now opportunity (e.g., the Facebook IPO). The year 1986 marked Coca-Cola's 100-year anniversary. If you had bought shares to commemorate the occasion, you'd be sitting on something like 15 to 20 times your initial investment. Time waits for no man — but stocks will.
94. How can we get rich? Per Ohio State economics professor Jay Zagorsky: "Staying married, not getting divorced, [and] thinking about savings." To those, I would add having the proper insurance coverage.
95. There are more than 2,000 stocks on the ASX. A great stock picker finds a few great stock ideas a year. Don't let the ones that got away frazzle you into buying the ones you should have ignored.
96. The US "Pink Sheets" and over-the-counter markets are where sketchy penny stocks live. Do yourself a favor and stick to stocks on major exchanges, here and overseas — preferably ones with market caps of more than $70 million. And never, ever heed 1 cent stock spam emails.
97. When I learned to drive, I nervously focused on each upcoming parked car. My father told me to focus down the road and the parked cars would take care of themselves. Perhaps my first lesson in investing.
98. Do not buy low and sell high; rather, buy low and don't sell often.
99. For the penultimate lesson, let's turn once more to Warren Buffett, who briefly said in his 2004 shareholder letter what took me 98 bullet points to say:
Over the 35 years, American business has delivered terrific results. It should therefore have been easy for investors to earn juicy returns: All they had to do was piggyback Corporate America in a diversified, low-expense way. An index fund that they never touched would have done the job. Instead many investors have had experiences ranging from mediocre to disastrous.
There have been three primary causes: first, high costs, usually because investors traded excessively or spent far too much on investment management; second, portfolio decisions based on tips and fads rather than on thoughtful, quantified evaluation of businesses; and third, a start-and-stop approach to the market marked by untimely entries (after an advance has been long under way) and exits (after periods of stagnation or decline). Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy only when others are fearful.
100. Despite my best efforts, I will repeatedly and thoroughly fail to heed these lessons. Let's hope you're better at No. 85 than I am.
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More reading
- The 100 things I've learnt in investing – part 1
- The 100 things I've learnt in investing – part 2
- The 100 things I've learnt in investing – part 3
- Coles and Woolies walk a fine line
- Can the Kindle Fire 2 challenge Apple?
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.
