When the wisdom of a legendary investor is beautifully packaged in one concise sentence, it’s like the intersection of investing and poetry. When you think about it, super-successful investing gurus have it pretty tough. They put in all that hard work over the years to make their money, and suddenly people want them – nay, expect them – to reveal the secrets to their success in 10 words or fewer! Fortunately, a lot of these successful investors seem happy to oblige. From Warren Buffett to Peter Lynch, and from Benjamin Franklin to Michael Jordan, here are 10 nuggets of investing…
When the wisdom of a legendary investor is beautifully packaged in one concise sentence, it’s like the intersection of investing and poetry.
When you think about it, super-successful investing gurus have it pretty tough. They put in all that hard work over the years to make their money, and suddenly people want them – nay, expect them – to reveal the secrets to their success in 10 words or fewer!
Fortunately, a lot of these successful investors seem happy to oblige. From Warren Buffett to Peter Lynch, and from Benjamin Franklin to Michael Jordan, here are 10 nuggets of investing wisdom and what we can all learn from them.
1. Sir John Templeton, investor and mutual fund pioneer: “The four most dangerous words in investing are: ‘This time is different.’’’
In the dot-com bubble of the late 1990s, people said it didn’t matter that most of the ballooning internet stocks had never come close to turning a profit. This was a “new economy.” Things were different.
In the more recent real-estate boom (which lead to the housing collapse and subsequently the global financial crisis of the late 2000s), it didn’t matter that homes were overvalued: We were protected by those complicated derivatives that nobody really understood. Things were different.
The lesson: Anytime you hear that things are different this time, invest as if things are the same as they always were.
2. John D. Rockefeller, the world’s richest man in the late 1800s: “The way to make money is to buy when blood is running in the streets.”
It sounds pretty callous, but it’s true. Take a look at any stock chart over a long period, and you’ll see some pretty big dips. Those were obviously the best buying opportunities, but they were also the times when the experts were urging you to sell.
Nonetheless, it’s easier said than done. It takes courage to buy when everyone else is running for the hills, but if you believe in the long-term fundamentals of the company or market involved, it’s the right thing to do.
The lesson: Think long-term. If the long-term outlook is good, then temporary crises are just great buying opportunities.
3. Peter Lynch, successful Fidelity fund manager: “Know what you own, and why you own it.”
Some investors pay fund managers small fortunes to invest their money for them. Others place their faith in stock tips from neighbours, a friend, or a guy in a coffee shop. But Peter Lynch knew that successful investing took hard work and that nobody else could do it for him.
He studied companies in immense detail, only investing when he was sure he understood their business models and prospects completely.
The lesson: Do the hard work and trust your own research – not someone else’s opinion. Emulating Peter Lynch means evaluating a business and its quality of management so you can easily and confidently answer the question, “Why do I own this stock?”
4. Warren Buffett, the “Sage of Omaha”: “Wide diversification is only required when investors do not understand what they are doing.”
This is an interesting one, because it goes against most investing advice you’ll read. Newspapers and websites preach diversification because it’s a safe investing style that works for most people. But Buffett didn’t get rich by diversifying. He made big calls on stocks he was super-confident about, and because he knew what he was doing, those calls paid off.
The lesson: If you can honestly say that you understand exactly what you’re doing and what the risks are, take bolder positions on fewer stock. If not, broad diversification is still the safest bet.
5. Paul Samuelson, Nobel Prize-winning economist: “Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.”
Most of the people quoted in this article got rich slowly. They took advantage of long-term growth and the compounding effect – things that are dull but effective. When they owned a stock, they didn’t worry about every zig and zag in the price. They were thinking in decades, not minutes.
The lesson: Embrace dullness. If you really want to speculate on whims and hunches, do it with a limited amount of money that you can afford to lose (some people call this a “mad money” account).
6. Benjamin Franklin, Founding Father of the United States of America: “An investment in knowledge pays the best interest.”
What’s better: doubling tour money on a stock pick or learning something that helps you make more money for the rest of your life? Clearly it’s the latter. The best investors don’t ever think of their education as complete; there’s always something new to learn. One good place to begin is our own “13 Steps to Financial Freedom” guide.
The lesson: Before you invest in stocks or bonds, invest in yourself.
7. Benjamin Graham, pioneering value investor: “In the short run, the market is a voting machine, but in the long run it is a weighing machine.”
Will the market go up or down today? It depends on the confidence of thousands of investors and traders (mostly institutional), which can shift from bullishness to panic in a heartbeat.
And will the market go up or down over the next 10 years? It depends on how much money companies can make in that time. That’s what Graham was saying, and it’s a valuable lesson. Try to tune out the popularity contest, and focus on weighing the merits of each investment.
The lesson: You can’t predict the short-term ups and downs of the market, but you can assess long-term value, so invest based on that.
8. Jim Cramer, CNBC speculator and former hedge fund manager: “Every once in a while, the market does something so stupid it takes your breath away.”
A great recent example would be the meteoric rise and subsequent collapse of Blumont Group (SGX: A33) and Asiasons Capital (SGX: 5ET). Both shares lost more than 90% of their market value in three trading days from 4 Oct 2013 to 8 Oct 2013.
Prior to its collapse, Blumont had gained as much as 3980% in less than a year and ended up selling for 500 times earnings and 60 times book value near its peak. Meanwhile, Asiasons Capital climbed 197% in just nineteen days shortly before its share price tanked and at one point before the debacle, was actually valued at 583 times its trailing earnings.
As Graham said, the market is a voting machine in the short run, and sometimes voters make bad decisions. The voters bid up Blumont and Asiasons Capital’s shares and likely got lost in the euphoria. In the end though, the weighing machine started working.
Sometimes, it’s easy to spot those moments of stupidity only in hindsight, so be prepared for the unexpected, and try to avoid getting caught up in either “irrational exuberance” or panic.
The lesson: Trust your own judgement and don’t follow the herd when it seems to be running off a cliff.
9. Jack Bogle, Vanguard founder: “Don’t look for the needle in the haystack. Just buy the haystack!”
This is the opposite of Warren Buffett’s advice. Which one to choose? It depends on an honest assessment of your own ability. If you think you can emulate Buffett’s knowledge, work ethic, and stock-picking prowess, make a few big investment calls. For most people, however, Bogle’s advice works best.
The market as a whole generally, represented by the Straits Times Index (SGX: ^STI), gives good long-term returns, so save yourself the stress if you’ll like to follow Bogle’s advice and just buy an index fund like the SPDR Straits Times Index Fund (SGX: ES3) or the Nikko AM Singapore STI ETF (SGX: G3B), both of which tracks the STI.
The lesson: It’s tough to beat the market, but simply matching it will generally give you good odds of success in the long run.
10. Michael Jordan, basketball star: “The minute you get away from the fundamentals – whether it’s proper technique, work ethic, or mental preparation – the bottom can fall out of your game.”
Well, ok, this quote wasn’t originally about investing, but it’s definitely worth reading every time you get the urge to click the “buy button” on a hot stock tip.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. This article was written by Wall Street Survivor and first published on fool.com. It has been edited for fool.sg