A year ago I started writing what I hoped would be a book called
500 Things you Need to know About Investing. I wanted to outline my favorite quotes, stats, and lessons about investing.
I failed. I quickly realized the idea was long on ambition, short on planning.
But I made it to 122, and figured it would be better in article form. Here it is.
1. Saying “I’ll be greedy when others are fearful” is easier than actually doing it.
2. When most people say they want to be a
millionaire, what they really mean is “I want to spend $1 million,”
which is literally the opposite of being a millionaire.
3. ”Some stuff happened” should replace 99% of references to “it’s a perfect storm.”
4. Daniel Kahneman’s book
Thinking Fast and Slow begins,
“The premise of this book is that it is
easier to recognize other
people’s mistakes than your own.” This should be every market
commentator’s motto.
5. Blogger Jesse Livermore writes, “My main life
lesson from investing: self-interest is the most powerful force on
earth, and can get people to embrace and defend almost anything.”
6. As Erik Falkenstein says: “In expert tennis, 80%
of the points are won, while in amateur tennis, 80% are lost. The same
is true for wrestling, chess, and
investing: Beginners should focus on
avoiding mistakes, experts on making great moves.”
7. There is a difference between, “He predicted the
crash of 2008,” and “He predicted crashes, one of which happened to
occur in 2008.” It’s important to know the difference when praising
investors.
8. Investor Dean Williams once wrote, “Confidence in
a forecast rises with the amount of information that goes into it. But
the accuracy of the forecast stays the same.”
9. Wealth is relative. As comedian Chris Rock said, “If Bill Gates woke up with Oprah’s money he’d jump out the window.”
10. Only 7% of Americans know stocks rose 32% last
year, according to Gallup. One-third believe the market either fell or
stayed the same.
Everyone is aware when markets fall; bull markets can
go unnoticed.
11. Dean Williams once noted that “Expertise is
great, but it has a bad side effect: It tends to create the inability to
accept new ideas.”
Some of the world’s best investors have no formal
backgrounds in finance — which helps them tremendously.
12. The
Financial Times wrote, “In 2008 the
three most admired personalities in sport were probably Tiger Woods,
Lance Armstrong and Oscar Pistorius.” The same falls from grace happen
in investing. Chose your role models carefully.
13. Investor Ralph Wagoner once explained how
markets work, recalled by Bill Bernstein: “He likens the market to an
excitable dog on a very long leash in New York City, darting randomly in
every direction. The dog’s owner is walking from Columbus Circle,
through Central Park, to the Metropolitan Museum. At any one moment,
there is no predicting which way the pooch will lurch. But in the long
run, you know he’s heading northeast at an average speed of three miles
per hour. What is astonishing is that almost all of the market players,
big and small, seem to have their eye on the dog, and not the owner.”
14. Investor Nick Murray once said, “Timing the
market is a fool’s game, whereas time in the market is your greatest
natural advantage.” Remember this the next time you’re compelled to cash
out.
15. Bill Seidman once said, “You never know what the
American public is going to do, but you know that they will do it all
at once.” Change is as rapid as it is unpredictable.
16. Napoleon’s definition of a military genius was,
“
the man who can do the average thing when all those around him are
going crazy.” Same goes in investing.
17. Blogger Jesse Livermore writes,”Most people,
whether bull or bear, when they are right, are right for the wrong
reason, in my opinion.”
18. Investors anchor to the idea that a fair
price for a stock must be more than they paid for it. It’s one of the
most common, and dangerous, biases that exists. “People do not get what
they want or what they expect from the markets; they get what they
deserve,” writes Bill Bonner.
19. Jason Zweig writes, “The advice that sounds the best in the short run is always the most dangerous in the long run.”
20. Billionaire investor Ray Dalio once said, “The
more you think you know, the more closed-minded you’ll be.” Repeat this
line to yourself the next time you’re certain of something.
21. During recessions, elections, and Federal
Reserve policy meetings, people become unshakably certain about things
they know very little about.
22. “
Buy and hold only works if you do both when
markets crash. It’s much easier to both buy and hold when markets are
rising,” says Ben Carlson.
23. Several studies have
shown that people prefer a pundit who is confident to one who is accurate. Pundits are happy to oblige.
24. According to J.P. Morgan, 40% of stocks have
suffered “catastrophic losses” since 1980, meaning they fell at least
70% and never recovered.
25. John Reed once wrote, “When you first
start to study a field, it seems like you have to memorize a zillion
things. You don’t. What you need is to identify the core principles —
generally three to twelve of them — that govern the field. The million
things you thought you had to memorize are simply various combinations
of the core principles.” Keep that in mind when getting frustrated over
complicated financial formulas.
26. James Grant says, “Successful investing is about having people agree with you … later.”
27. Scott Adams writes,
“A person with a flexible
schedule and average resources will be happier than a rich person who
has everything except a flexible schedule. Step one in your search for
happiness is to continually work toward having control of your
schedule.”
28. According to Vanguard, 72% of mutual funds benchmarked to the
S&P 500underperformed the index over a 20-year period ending in 2010. The phrase “professional investor” is a loose one.
29. ”
If your investment horizon is long enough and
your position sizing is appropriate, you simply don’t argue with idiocy,
you bet against it,” writes Bruce Chadwick.
30. The phrase “double-dip recession” was mentioned 10.8 million times in 2010 and 2011, according to
Google.
It never came. There were virtually no mentions of “financial collapse”
in 2006 and 2007. It did come. A similar story can be told virtually
every year.
31. According to Bloomberg, the 50 stocks in the
S&P 500 that Wall Street rated the lowest at the end of 2011
outperformed the overall index by 7 percentage points over the following
year.
32. ”The big money is not in the buying or the selling, but in the sitting,” said Jesse Livermore.
33. Investors want to believe in someone.
Forecasters want to earn a living. One of those groups is going to
be disappointed. I think you know which.
34. In a poll of 1,000 American adults, asked, “How
many millions are in a trillion?” 79% gave an incorrect answer or didn’t
know. Keep this in mind when debating large financial problems.
35. As last year’s Berkshire Hathaway shareholder
meeting, Warren Buffett said he has owned 400 to 500 stocks during his
career, and made most of his money on 10 of them. This is common: a
large portion of investing success often comes from a tiny proportion of
investments.
36. Wall Street consistently expects earnings to beat expectations. It also loves oxymorons.
37. The S&P 500 gained 27% in 2009 — a
phenomenal year. Yet 66% of investors thought it fell that year,
according to a survey by Franklin Templeton. Perception and reality can
be miles apart.
38. As Nate Silver writes, “When a possibility is
unfamiliar to us, we do not even think about it.” The biggest risk is
always something that no one is talking about, thinking about, or
preparing for. That’s what makes it risky.
39. The next recession is never like the last one.
40. Since 1871, the market has spent 40% of all
years either rising or falling more than 20%. Roaring booms and crushing
busts are perfectly normal.
41. As the saying goes, “Save a little bit of money
each month, and at the end of the year you’ll be surprised at how little
you still have.”
42. John Maynard Keynes once wrote, “
It is safer to
be a speculator than an investor in the sense that a speculator is one
who runs risks of which he is aware and an investor is one who runs
risks of which he is unaware.”
43. ”History doesn’t crawl; it leaps,” writes Nassim
Taleb. Events that change the world — presidential assassinations,
terrorist attacks, medical breakthroughs, bankruptcies — can happen
overnight.
44. Our memories of financial history seem to extend
about a decade back. “Time heals all wounds,” the saying goes. It also
erases many important lessons.
45. You are under no obligation to read or watch
financial news. If you do, you are under no obligation to take any of it
seriously.
46. The most boring companies — toothpaste, food,
bolts — can make some of the best long-term investments. The most
innovative, some of the worst.
47. In a 2011 Gallup poll, 34% of Americans said
gold was the best long-term investment, while 17% said stocks. Since
then, stocks are up 87%, gold is down 35%.
48. According to economist Burton Malkiel, 57 equity
mutual funds underperformed the S&P 500 from 1970 to 2012. The
shocking part of that statistic is that 57 funds could stay in business
for four decades while posting poor returns. Hope often triumphs over
reality.
49. Most economic news that we think is important doesn’t matter in the long run. Derek Thompson of
The Atlantic once
wrote, “I’ve written hundreds of articles about the economy in the last
two years. But I think I can reduce those thousands of words to one
sentence.
Things got better, slowly.”
50. A broad index of U.S. stocks increased
2,000-fold between 1928 and 2013, but lost at least 20% of its value 20
times during that period. People would be less scared of volatility if
they knew how common it was.
51. The “evidence is unequivocal,” Daniel Kahneman writes, “there’s a great deal more luck than skill in people getting very rich.”
52. There is a strong correlation between knowledge and humility. The best investors realize how little they know.
53. Not a single person in the world knows what the market will do in the short run.
54. Most people would be better off if they stopped
obsessing about Congress, the Federal Reserve, and the president, and
focused on their own financial mismanagement.
55. In hindsight, everyone saw the financial crisis
coming. In reality, it was a fringe view before mid-2007. The next
crisis will be the same (they all work like that).
56. There were 272 automobile companies in 1909.
Through consolidation and failure, three emerged on top, two of which
went bankrupt. Spotting a promising trend and a winning investment are
two different things.
57. The more someone is on TV, the less likely his
or her predictions are to come true. (University of California, Berkeley
psychologist Phil Tetlock has data on this).
58. Maggie Mahar once wrote that “men resist
randomness, markets resist prophecy.” Those six words explain most
people’s bad experiences in the stock market.
59. ”We’re all just guessing, but some of us have fancier math,” writes Josh Brown.
60. When you think you have a great idea, go out of
your way to talk with someone who disagrees with it. At worst, you
continue to disagree with them. More often, you’ll gain valuable
perspective. Fight confirmation bias like the plague.
61. In 1923, nine of the most successful U.S. businessmen met in Chicago. Josh Brown writes:
Within 25 years, all of these great men had met a horrific end to their careers or their lives:
The president of the largest steel company, Charles Schwab, died a
bankrupt man; the president of the largest utility company, Samuel
Insull, died penniless; the president of the largest gas company, Howard
Hobson, suffered a mental breakdown, ending up in an insane asylum; the
president of the New York Stock Exchange, Richard Whitney, had just
been released from prison; the bank president, Leon Fraser, had taken
his own life; the wheat speculator, Arthur Cutten, died penniless; the
head of the world’s greatest monopoly, Ivar Krueger the ‘match king’
also had taken his life; and the member of President Harding’s cabinet,
Albert Fall, had just been given a pardon from prison so that he could
die at home.
62. Try to learn as many investing mistakes as
possible vicariously through others. Other people have made every
mistake in the book. You can learn more from studying the investing
failures than the investing greats.
63. Bill Bonner says there are two ways to think
about what money buys. There’s the standard of living, which can be
measured in dollars, and there’s the quality of your life, which can’t
be measured at all.
64. If you’re going to try to predict the future —
whether it’s where the market is heading, or what the economy is going
to do, or whether you’ll be promoted — think in terms of probabilities,
not certainties. Death and taxes, as they say, are the only exceptions
to this rule.
65. Focus on not getting beat by the market before you think about trying to beat it.
66. Polls show Americans
for the last 25 years have said the economy is in a state of decline.
Pessimism in the face of advancement is the norm.
67. Finance would be better if it was taught by the psychology and history departments at universities.
68. According to economist Tim Duy, “As long as
people have babies, capital depreciates, technology evolves, and tastes
and preferences change, there is a powerful underlying impetus for
growth that is almost certain to reveal itself in any reasonably
well-managed economy.”
69. Study successful investors, and you’ll notice a common denominator: they are masters of psychology. They can’t control the market, but they have complete control over the gray matter between their ears.
70. In finance textbooks, “risk” is defined as
short-term volatility. In the real world, risk is earning low returns,
which is often caused by trying to avoid short-term volatility.
71. Remember what Nassim Taleb says about randomness
in markets: “If you roll dice, you know that the odds are one in six
that the dice will come up on a particular side. So you can calculate
the risk. But, in the stock market, such computations are bull — you
don’t even know how many sides the dice have!”
72. The S&P 500 gained 27% in 1998. But just five stocks — Dell, Lucent,
Microsoft,
Pfizer,
and
Wal-Mart — accounted for more than half the gain. There can be huge concentration even in a diverse portfolio.
73. The odds that at least one well-known company is insolvent and hiding behind fraudulent accounting are pretty high.
74. The book
Where Are the Customers’ Yachts? was written in 1940, and most people still haven’t figured out that brokers don’t have their best interest at heart.
75. Cognitive psychologists have a theory called
“backfiring.” When presented with information that goes against your
viewpoints, you not only reject challengers, but double down on your
view. Voters often view the candidate they support more favorably after
the candidate is attacked by the other party. In investing, shareholders
of companies facing heavy criticism often become die-hard supporters
for reasons totally unrelated to the company’s performance.
76. ”In the financial world, good ideas become bad
ideas through a competitive process of ‘can you top this?’” Jim Grant
once said. A smart investment leveraged up with debt becomes a bad
investment very quickly.
77. Remember what Wharton professor Jeremy Siegel
says: “You have never lost money in stocks over any 20-year period, but
you have wiped out half your portfolio in bonds [after inflation]. So
which is the riskier asset?”
78. Warren Buffett’s best returns were achieved when
markets were much less competitive. It’s doubtful anyone will ever
match his 50-year record.
79. Twenty-five hedge fund managers took home $21.2
billion in 2013 for delivering an average performance of 9.1%, versus
the 32.4% you could have made in an index fund. It’s a great business to
work in — not so much to invest in.
80. The United States is the only major economy in
which the working-age population is growing at a reasonable rate. This
might be the most important economic variable of the next half-century.
81. Most investors have no idea how they actually
perform. Markus Glaser and Martin Weber of the University of Mannheim
asked investors how they thought they did in the market, and then looked
at their brokerage statements. “The correlation between self ratings
and actual performance is not distinguishable from zero,” they
concluded.
82. Harvard professor and former Treasury Secretary
Larry Summers says that “virtually everything I taught” in economics was
called into question by the financial crisis.
83. Asked about the economy’s performance after the
financial crisis, Charlie Munger said, “If you’re not confused, I don’t
think you understand.”
84. There is virtually no correlation between what
the economy is doing and stock market returns. According to Vanguard,
rainfall is actually a better predictor of future stock returns than GDP
growth. (Both explain slightly more than nothing.)
85. You can control your portfolio allocation, your
own education, who you listen to, what you read, what evidence you pay
attention to, and how you respond to certain events. You cannot control
what the Fed does, laws Congress sets, the next jobs report, or whether a
company will beat earnings estimates. Focus on the former; try to
ignore the latter.
86. Companies that focus on their stock price will
eventually lose their customers. Companies that focus on their customers
will eventually boost their stock price. This is simple, but forgotten
by countless managers.
87. Investment bank Dresdner Kleinwort looked at
analysts’ predictions of interest rates, and compared that with what
interest rates actually did in hindsight. It found an almost perfect
lag. “Analysts are terribly good at telling us what has just happened
but of little use in telling us what is going to happen in the future,”
the bank wrote. It’s common to confuse the rearview mirror for the
windshield.
88. Success is a lousy teacher,” Bill Gates once said. “It seduces smart people into thinking they can’t lose.”
89. Investor Seth Klarman says, “Macro worries are
like sports talk radio. Everyone has a good opinion which probably means
that none of them are good.”
90. Several academic studies have shown that those
who trade the most earn the lowest returns. Remember Pascal’s wisdom:
“All man’s miseries derive from not being able to sit in a quiet room
alone.”
91. The best company in the world run by the smartest management can be a terrible investment if purchased at the wrong price.
92. There will be seven to 10 recessions over the next 50 years. Don’t act surprised when they come.
93. No investment points are awarded for difficulty or complexity. Simple strategies can lead to outstanding returns.
94. The president has much less influence over the economy than people think.
95. However much money you think you’ll need for retirement, double it. Now you’re closer to reality.
96. For many, a house is a large liability masquerading as a safe asset.
97. The single best three-year period to own stocks
was during the Great Depression. Not far behind was the three-year
period starting in 2009, when the economy struggled in utter ruin. The
biggest returns begin when most people think the biggest losses are
inevitable.
98. Remember what Buffett says about progress: “First come the innovators, then come the imitators, then come the idiots.”
99. And what Mark Twain says about truth: “A lie can travel halfway around the world while truth is putting on its shoes.”
100. And what Marty Whitman says about information:
“Rarely do more than three or four variables really count. Everything
else is noise.”
101. Among Americans aged 18 to 64, the average
number of doctor visits decreased from 4.8 in 2001 to 3.9 in 2010. This
is partly because of the weak economy, and partly because of the growing
cost of medicine, but it has an important takeaway: You can never
extrapolate behavior — even for something as vital as seeing a doctor —
indefinitely. Behaviors change.
102. Since last July, elderly Chinese can sue their
children who don’t visit often enough, according to Bloomberg. Dealing
with an aging population calls for drastic measures.
103. Someone once asked Warren Buffett how to become
a better investor. He pointed to a stack of annual reports. “Read 500
pages like this every day,” he said. “That’s how knowledge works. It
builds up, like compound interest. All of you can do it, but I guarantee
not many of you will do it.”
104. If Americans had as many babies from 2007 to
2014 as they did from 2000 to 2007, there would be 2.3 million more kids
today. That will affect the economy for decades to come.
105. The Congressional Budget Office’s 2003
prediction of federal debt in the year 2013 was off by $10 trillion.
Forecasting is hard. But we still line up for it.
106. According to
The Wall Street Journal, in 2010, “for every 1% decrease in shareholder return, the average CEO was paid 0.02% more.”
107. Since 1994, stock market returns are flat if
the three days before the Federal Reserve announces interest rate policy
are removed, according to a study by the Federal Reserve.
108. In 1989, the CEOs of the seven largest U.S.
banks earned an average of 100 times what a typical household made. By
2007, more than 500 times. By 2008, several of those banks no longer
existed.
109. Two things make an economy grow: population
growth and productivity growth. Everything else is a function of one of
those two drivers.
110. The single most important investment question
you need to ask yourself is, “How long am I investing for?” How you
answer it can change your perspective on everything.
111. ”Do nothing” are the two most powerful — and
underused — words in investing. The urge to act has transferred an
inconceivable amount of wealth from investors to brokers.
112. Apple increased more than 6,000% from 2002 to 2012, but declined on 48% of all trading days. It is never a straight path up.
113. It’s easy to mistake luck for succe
ss. J.Paul Getty said, the key to success is: 1) rise early, 2) work hard, 3) strike oil.
114. Dan Gardner writes, “No one can foresee the
consequences of trivia and accident, and for that reason alone, the
future will forever be filled with surprises.”
115. I once asked Daniel Kahneman about a key to
making better decisions. “You should talk to people who disagree with
you and you should talk to people who are not in the same emotional
situation you are,” he said. Try this before making your next investment
decision.
116. No one on the Forbes 400 list of richest
Americans can be described as a “perma-bear.” A natural sense of
optimism not only healthy, but vital.
117. Economist Alfred Cowles dug through forecasts a
popular analyst who “had gained a reputation for successful
forecasting” made in
The Wall Street Journal in the early
1900s. Among 90 predictions made over a 30-year period, exactly 45 were
right and 45 were wrong. This is more common than you think.
118. Since 1900, the S&P 500 has returned about
6.5% per year, but the average difference between any year’s highest
close and lowest close is 23%. Remember this the next time someone tries
to explain why the market is up or down by a few percentage points.
They are basically trying to explain why summer came after spring.
119. How long you stay invested for will likely be the single most important factor determining how well you do at investing.
120. A money manager’s amount of experience doesn’t tell you much. You can underperform the market for an entire career. Many have.
121. A hedge fund once described its edge by
stating, “We don’t own one Apple share. Every hedge fund owns Apple.”
This type of simple, contrarian thinking is worth its weight in gold in
investing.
122. Take two investors. One is an MIT rocket
scientist who aced his SATs and can recite pi out to 50 decimal places.
He trades several times a week, tapping his intellect in an attempt to
outsmart the market by jumping in and out when he’s determined it’s
right. The other is a country bumpkin who didn’t attend college. He
saves and invests every month in a low-cost index fund come hell or high
water. He doesn’t care about beating the market. He just wants it to be
his faithful companion. Who’s going to do better in the long run? I’d
bet on the latter all day long. “Investing is not a game where the guy
with the 160 IQ beats the guy with a 130 IQ,” Warren Buffett says.
Successful investors know their limitations, keep cool, and act with
discipline. You can’t measure that.
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