Successful investing doesn’t need to be difficult, but with so many options available to the individual investor, it’s sometimes easy to lose sight of the bigger picture, and remember the things we learn along the way. In an attempt to stop making the same mistakes over and over, here’s my attempt to codify the 100 lessons I’ve learned in my investing career so far. Part 1 contains the first 25 lessons.
1. Most of this list is dedicated to insight on beating the market, but know this: It’s darn hard to do. Ninety-nine percent of most people are best served steadily buying and holding low-cost index funds at the core of their portfolios.
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3. Being contrarian doesn’t just mean doing the opposite. The “contrarian” street-crosser gets run over by a truck.
4. In any financial matter, find out what the other person’s incentives are. Proceed accordingly.
5. Even a gut investment call should have some numbers to back it up.
6. Mistakes made in your 20s are better than mistakes in your 50s. Mistakes involving $100 are better than mistakes involving $100,000.
7. My all-time favorite Warren Buffett quote: “We like things that you don’t have to carry out to three decimal places. If you have to carry them out to three decimal places, they’re not good ideas.”
8. Never buy stocks on margin, no matter how “can’t miss” the opportunity is. That blend of leverage and arrogance is exactly what gets the experts in trouble. The difference is that we’re not too big to fail.
9. Don’t waste time mastering things that simply don’t work (see lessons 10 through 12).
10. Example No. 1: day trading. Like playing roulette, you’ll have some victories, and you may be able to fool yourself into thinking you’re skillful. The house just hopes you keep playing.
11. Example No. 2: technical analysis. The only chart pattern worth noting is the jagged, but likely downward-sloping line of your savings if you follow this technique.
12. Example No. 3: Buy and hold forever. Company fortunes change, technological changes can leave companies behind. Just ask investors in Fairfax Media Limited (ASX: FXJ).
13. Stock stories about growth potential (e.g., tech stocks) are sexier than stock stories about track record (e.g., consumer goods stocks). Only the latter are verifiable today, though. Linc Energy Limited (ASX: LNC) is a prime example, popular stock, but no profit history.
14. Having a strong opinion (let alone acting on it) is overrated. Knowing 20 stocks well beats knowing a little about 100 stocks.
15. Albert Einstein allegedly declared compound interest “the most powerful force in the universe.” High-interest credit card debt aims that force at your wallet. To get compound interest pointed in the right direction, save (and invest) early and often!
16. A casino makes us use chips in lieu of cash, partially because we forget that the chips represent real money. Stocks may act in screwy ways and invite us to play games, but as investors we can’t lose sight of the fact that stocks represent real companies. As Peter Lynch puts it using a different gambling analogy, “Although it’s easy to forget sometimes, a share is not a lottery ticket … it’s part-ownership of a business.” Even better, be the house, invest your hard earned in casino operator Crown Limited (ASX: CWN) or poker machine maker Aristocrat Leisure Limited (ASX: ALL).
17. When talking to other investors, have your BS detector handy. When you hear their “big fish” stories, know that their brilliant track records likely have more to do with selective memory and poor scorekeeping than skill.
18. A great Buffett reason not to fudge our taxes: “We’ll never risk what we have for what we don’t have and don’t need.”
19. Those who know what they’re doing make complexity seem simple. Folks who don’t (or are trying to sell you something) make simplicity complex.
20. A clear sign of the latter: jargon.
21. Asset allocation is more important than stock picking. A silly example: Say you’re holding a race among five horses and five human beings. Many investors spend their time trying to rank the five human beings, when they’re better off just betting on the five horses.
22. If you don’t understand it, don’t buy it until you do.
23. Sigh — hard work is required to beat the market. Per Peter Lynch: “The person that turns over the most rocks wins the game. And that’s always been my philosophy.”
24. On the plus side, the results of hard work can be breathtaking. In his book Outliers, Malcolm Gladwell gives example after example of people we term “geniuses” who are really hyper-dedicated people who work at their craft relentlessly. Among the examples he uses are Bill Gates and the Beatles. He argues that both got to where they got because of the opportunity (and inclination) to hone their skills for 10,000 hours. That’s the equivalent of five full years of work — or 1,000 weeks of practicing 10 hours a week.
Gates had access to an ultra-high-end computer terminal because his exclusive middle school started a computer club. In high school, his access went up a notch as he gained access to the computers at the University of Washington. He talks of getting 20 to 30 hours of programming time in each weekend. On weeknights, he’d slip out of his house to take advantage of the open time-sharing slots from 3 a.m. to 6 a.m. And the Beatles were just as obsessed. By the time they broke out on the Ed Sullivan show in 1964, the Beatles had played an estimated 1,200 shows, some lasting eight hours!
25. None of the time spent checking and rechecking your portfolios online counts toward those 10,000 hours. And here’s the real kick in the groin: 10,000 hours is a prerequisite for mastery — not a guarantee.
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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.