Lessons for New Investors
1. Investing is not risky for the reasons (like volatility) it is made out to be the jargon-filled analysts, fund managers, and other market experts. Investing is risky if you do not understand what you are getting into and why. In fact, not investing well is a greater risk.
2. You do not need a high IQ to do well as an investor. In fact, the biggest financial crises have been caused by the highest IQ people. What you need is good EQ (like impulse control) so as to minimize the mistakes of bad behavior that causes investors to make big mistakes.
3. To become a decently good investor, you don’t need to spend 5-6 or more hours per week worrying about your stocks or other investments. There are better things to do in life. Become well educated about your investments ‘before’ you make them, and then let the wheel roll.
4. Investing is NOT about beating the market or your colleague, neighbor, or enemy. Your main task as an investor should be to protect your capital over the long term and beat ‘inflation’, so you are able to maintain or grow your purchasing power and meet your financial goals.
5. Unlike what stock market folklore may have led you to believe, high risk does not equal high return.
When you buy good investments at reasonable prices – and you know that well – you are taking low risks that should set you up for reasonably high returns.
6. Legendary investor Sir John Templeton said, “The four most dangerous words in investing are ‘This time it’s different.’” It is ‘never’ different. Booms and busts happen in almost the same way, and investors lose money when they start believing that ‘this time it’s different’.
7. ‘Diversification is for losers, you must concentrate,’ is an advice I received in the early part of my career.
It is bad advice for most new investors. Concentration can make you big money, but has huge risks that only unfurl with time. Diversify enough. Not too much.
8. You are likely to succeed as an investor not just by the stocks you own, but more importantly by the ones you don’t. Create portfolios like a museum curator (choose well), not a warehouse manager (choose everything).12-15 stocks and 3-5 funds are enough. You don’t need more.
9. What you need to succeed as an investor is independent thinking.
Lessons for Old (Experienced) Investors
1. Just being in the markets for 15-20 years does not mean you have known and seen everything that is there to see in investing. Markets will continue to prepare some really tough question papers for you. Don’t get caught napping.
2. You may have gotten one prediction right in the last 20 years. This does not make you an expert in predicting, especially the future. So, stop predicting and seeking predictions. Just keep preparing for the rough times coming your way (and they will).
3. The best of investors have not been able to master their emotions. So, if you think you have hope, think again. We are not rational beings, even if economics text books assume we are. And so, the best hope you have is to minimize mistakes of emotions, not eliminate them.
4. One safe way to avoid becoming an emotional fool from time to time is to have a ‘process’ that suits you, and a sound checklist that takes away some weight from your mind and helps automate a large part of your decision making. So, have a process. Then, have faith in it.
5. Experience does not guarantee that you understand the complexity of the markets and its participants. A powerful antidote against the complexity of markets is the simplicity with which you should invest. “Keep it simple” is good advice for kids, and for grown up kids too.
6. Stop consuming media, even if the anchor looks handsome or beautiful, or sounds smart. Most of it is noise. Since you often do not know what isn’t, you are better off completely avoiding it. Believe me, life is happier avoiding media, and investment decisions saner.
7. With ~20 years in the market, you must be in your 40s or 50s. Your body is not fit enough to handle much stress. So, please do not stress out watching the stock ticker minute by minute, and causing your heart to miss beats. You anyways don’t control the ticker. Accept this.
8. You may have accumulated enough in the first 40 years of your life. Now is the time to subtract.
Subtract negative people, a lot of useless stuff, useless stocks, useless advice, and useless practices from your life. Focus on what’s enduring. Leave the ephemeral out.
9. Legendary investor Howard Marks says, “There are old investors, and there are bold investors, but there are no old bold investors.” Remember this. In great likelihood, if you keep acting bold, you may never reach your old. The mind and body have their limits. Know that.
10. Spend less and less time in the stock market, and more time outside of it. Maybe, add philosophy and spirituality to your life. Learn art. Read old books. Learn to write. Start a diary. Do anything instead of keeping a constant focus on your stocks, portfolio, and net worth.
11. Do what Kurt Vonnegut said “makes your soul grow.”
