100 things to know about investing.txt
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The 100 Things I've Learned in Investing
By Anand Chokkavelu, CFA | More ArticlesJune 29, 2012 | Comments (40)
As you'll see in No. 47 on my list, it's very important to step back and gainperspective. In an attempt to stop making the same mistakes over and over, here's myattempt to codify the 100 lessons I've learned in my investing career so far.
1. Most of this list is dedicated to insight on beating the market, but know this:It's darn hard to beat the market. Ninety-nine percent of people are best servedsteadily buying and holding low-cost index funds at the core of their portfolios --and I may be understating that 99% figure.
2. Looking for a one-stop index-fund core? For a very reasonable 0.2% in fees ayear, Vanguard target date retirement funds will automatically diversify and balancethe stock and bond portions of your portfolio -- just pick your retirement date. TheVanguard family of index funds is what I recommend to just about everyone who asks.
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.Discount accordingly.
100 things to know about investing.txt5. 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. Mistakesinvolving $100 are better than mistakes involving $100,000.
7. My all-time favorite Warren Buffett quote: "We like things that you don't have tocarry out to three decimal places. If you have to carry them out to three decimalplaces, they're not good ideas."
8. Never buy stocks on margin, no matter how "can't miss" the opportunity is. Thatblend of leverage and arrogance is exactly what gets Wall Street in trouble. Thedifference is that we're not too big to fail.
9. Don't waste time mastering things that simply don't work (see lessons 10 through12).
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 justhopes you keep playing.
11. Example No. 2: technical analysis. The only chart pattern worth noting is thejagged, but likely downward-sloping line of your savings if you follow thistechnique.
12. Example No. 3: leveraged ETFs. Bastardized ETFs like the Direxion DailyFinancial Bull 3X (NYSE: FAS ) are another great way to lose money. Even if youguess right on direction, the mathematics of the daily reckoning mean theseinstruments are long-term losers.
13. Stock stories about growth potential (e.g., tech stocks) are sexier than stockstories about track record (e.g., consumer goods stocks). Only the latter areverifiable today, though.
14. Having a strong opinion (let alone acting on it) is overrated. Knowing 20 stockscold beats being able to challenge Jim Cramer in the lightning round.
15. Albert Einstein allegedly declared compound interest "the most powerful force inthe universe." High-interest credit card debt aims that force at your wallet. To getcompound 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 thatthe chips represent real money. Stocks may act in screwy ways and invite us to playgames, but as investors we can't lose sight of the fact that stocks represent realcompanies. As Peter Lynch puts it using a different gambling analogy, "Although it'seasy to forget sometimes, a share is not a lottery ticket ... it's part-ownership ofa business."
17. When talking to other investors, have your BS detector handy. When you heartheir "big fish" stories, know that their brilliant track records likely have moreto 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 havefor 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: Sayyou're holding a race among five horses and five human beings. Many investors spendtheir time trying to rank the five human beings, when they're better off justbetting on the five horses.
100 things to know about investing.txt
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 personthat 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 bookOutliers, Malcolm Gladwell gives example after example of people we term "geniuses"who are really hyper-dedicated people who work at their craft relentlessly. Amongthe examples he uses are Bill Gates and the Beatles. He argues that both got towhere they got because of the opportunity (and inclination) to hone their skills for10,000 hours. That's the equivalent of five full years of work -- or 1,000 weeks ofpracticing 10 hours a week.
Gates had access to an ultra-high-end computer terminal because his exclusive middleschool started a computer club. In high school, his access went up a notch as hegained access to the computers at the University of Washington. He talks of getting20 to 30 hours of programming time in each weekend. On weeknights, he'd slip out ofhis house to take advantage of the open time-sharing slots from 3 a.m. to 6 a.m. Andthe Beatles were just as obsessed. By the time they broke out on the Ed Sullivanshow in 1964, the Beatles had played an estimated 1,200 shows, some lasting eighthours!
25. None of the time spent checking and rechecking Yahoo! Finance portfolios countstoward those 10,000 hours. And here's the real kick in the groin: 10,000 hours is aprerequisite for mastery -- not a guarantee.
26. Common sense is as uncommon in investing as it is in real life.
27. One of my favorite lessons from the poker table: Action is overrated. The bestplayers (and investors) are constantly weighing the opportunities, but rarely arethey moved to act.
28. A similar sentiment by Vanguard founder Jack Bogle: "Time is your friend;impulse is your enemy."
29. Selling is overrated. Reason No. 1: We often sell potential multibagger winnersthat would more than make up for our losers. The greater the quality of thebusiness, the greater the danger of selling too early.
30. Selling is overrated. Reason No. 2: Outside of retirement accounts, sellingkicks in voluntary taxes.
31. Selling is overrated. Reason No. 3: Fees.
32. In the hands of a good storyteller, almost every stock looks like a winner.Assume you're not hearing the whole story.
33. A question to ask before buying a stock: "What's my competitive advantage onthis stock? Do I really know something the market doesn't?" The more specific theadvantage, the better.
34. Sweat the big stuff.
35. Most of us are too enamored with "so you're saying there's a chance"opportunities. A Hail Mary belongs on the gridiron or in the pew -- not in thebrokerage account.
36. A great rule of thumb for buying a house (the biggest single investment most ofus will ever make), from fellow Fool Buck Hartzell back in 2005: "If a home isselling for 150 times the monthly rent (or less), it's generally a good deal. Ifit's selling for more than 200 times the monthly rent of a comparable property,you're better off renting."
100 things to know about investing.txt
37. One of the toughest facts about investing is that a proper track record takesdecades. Charlatans can do quite well for years and years. This is potentiallydangerous for our assessment of ourselves and of others. Focusing on process, ratherthan results, helps.
38. Price matters. A great company can be a great big loss for you if you pay toomuch.
39. When applicable, use the tax system to your advantage. Retirement accounts like401(k)s and IRAs can be huge boons.
40. It is twice as easy to sound intelligent being pessimistic about the future asit is being optimistic.
41. Greater risk theoretically yields greater reward, but a stupid investment isjust a stupid investment.
42. Sir John Templeton's quote: "'This time it's different' are the four mostexpensive words in the investing language." The details change, but the basicstorylines remain the same.
43. Investing shouldn't be improv. Take the time to write a thoughtful script.
44. A key Buffett quote to understand: "Time is the friend of the wonderful company,the enemy of the mediocre." Why is this so? Partially because "you only find out whois swimming naked when the tide goes out." I really struggle to abide by thisadvice. I am often the Statue of Liberty when it comes to investing in inferiorcompanies on the cheap: "Give me your tired, your poor, your huddled masses," etc.
45. Options promise big gains in short time periods. The problem? About three out ofevery four expire worthless. Contrast that with a stock, which doesn't expire.
46. Sorry, market timers: Take it from Peter Lynch, w