“The 4 most dangerous words in investing are: this time it’s different” Sir John Templeton
When markets rise, it’s tempting to think they will continue to soar forever.
You might hear stock market commentators claim that a so-called “goldilocks” period has arrived. But markets rise and fall, and cycle over time, so expect the swings and roundabouts, and be skeptical of any claims of perpetual growth.
Equally, it’s important to be wary of fear merchants who peddle gloom and doom.
Even after stock markets crash, they tend to bounce back over time as value investors step in to buy undervalued companies.
“The individual investor should act consistently as an investor and not as a speculator” Benjamin Graham
Think of a stock you own as an investment you will hold for the long-term as opposed to a vehicle to generate a quick buck from one day to the next.
This is especially true when you are investing savings in a retirement account, such as an IRA, over the long-term.
“In investing, what is comfortable is rarely what is profitable” Robert Arnott
If you went to the local department store and found an item on sale that you wanted to purchase, you would probably be pleased to find the price is lower and consider it a good deal.
But when a stock has sold off, it can be hard to think of it as being on sale because fear creeps in and the doubts weigh heavily, such as “what if the stock falls further?” – sometimes you need to be courageous and buy when stocks are on sale and other times you need to ring the register and sell when euphoria is in the market and fear among stock market traders seems to have evaporated.
“I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful” Warren Buffett
Perhaps the most famous investing quote of all from Warren Buffett is to be fearful when others are greedy and be greedy when others are fearful.
This means when markets have been rising for a long time and appear as if they will never fall, yet people are rushing in to the stock market to buy more stocks, it’s time to be cautious.
And when stock markets have fallen, perhaps even crashed lower, and everyone else is panicking and selling, that is when great opportunities to buy appear.
“An investment in knowledge pays the best interest” Benjamin Franklin
Warren Buffett has a similar philosophy as Ben Franklin that you should invest in learning and acquiring wisdom. In the world of investing, it will enable you to conduct smarter due diligence, make more rational decisions, and allocate capital more intelligently.
“The stock market is filled with individuals who know the price of everything and the value of nothing” Phillip Fisher
The danger of looking at stock prices alone is that you don’t necessarily know what stocks are worth, so if stocks fall in price you won’t know if they are on sale or overvalued.
Learn how to value stocks and you won’t ever be left wondering whether a price fluctuation is something to be concerned about or something to dismiss.
“Know what you own, and know why you own it” Peter Lynch
It is easy to buy a stock but when its price falls it can be just as easy to panic and sell it if you don’t know the quality of the company you own and the reason you purchased it in the first place.
If the idea of performing due diligence on investments doesn’t sound appealing, consider a more hands-off investing method whereby a robo-advisor automatically invests your savings in a diversified way that matches your risk profile and financial goals.
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“If you have trouble imagining a 20% loss in the stock market, you shouldn’t be in stocks” John Bogle
Investing in the stock market can feel like a rollercoaster ride with turbulent swings from time to time.
If the idea of big account swings is not appealing, consider a diversified portfolio that allocates a greater portion of your portfolio to fixed-income investments, such as government bonds, municipal bonds and corporate bonds.
“Value investing is at its core the marriage of a contrarian streak and a calculator” Seth Klarman
Seth Klarman is not as famous as Warren Buffett but when he reaches Buffett’s age he might be as wealthy.
The legendary investor highlights the importance of being both quantitative in knowing the value of a company and having the propensity, courage and willingness to go against the crowd in order to invest successfully over the long-term.
When markets are trading at elevated levels and your analysis reveals they are overvalued, sometimes you need to have the courage to sell. And when markets are low and the numbers suggest they are undervalued, sometimes you need to have the courage to buy.
“Risk comes from not knowing what you are doing” Warren Buffett
Speculation in the stock market can be deadly if you don’t know investing basics. Learn how to analyze companies, read quarterly statements, and understand financial statements. It’s important to keep learning so you can more intelligently invest.
“If investing is entertaining. If you’re having fun, you’re probably not making any money. Good investing is boring” George Soros
In a world where financial news networks are compensated from advertising dollars that increase with higher viewer figures, the temptation of the financial media is to make stock market investing entertaining to engage audiences.
But successful investing is often as boring as watching paint dry. Besides, the more you trade, the more commissions you pay and quickly you risk churning your account and making your broker rich instead of yourself.
Action bias is the danger of confusing action with progress. Trading more doesn’t necessarily mean making more money. Sometimes trading less results in making more money.
“All intelligent investing is value investing. You must value the business in order to value the stock” Charlie Munger
Warren Buffett’s business partner for most of his life has been Charlie Munger, who advocates that before deciding to pay for a stock you should know what the underlying company is worth.
You wouldn’t buy a home or a car without knowing what they are worth so why buy a stock based on the price alone; better to pay heed to the value of the underlying business.
“Buy not on optimism. Buy on arithmetic” Benjamin Graham
As markets and stocks rise in value, optimism increases that they will continue to soar. But pay close attention to what a stock is actually worth, calculate its value, and make a decision then on whether the price you pay reflects the value its worth.
“Investing is the intersection of economics and psychology” Seth Klarman
Financial institutions spend billions each year crunching through data analysis to assess company valuations but stock market investors sometimes act as a herd, and when they all run in one direction, quantitative measures are replaced by emotional decision-making. When the so-called smart money acts dumb, more opportunities appear for you to make money.
“Markets can remain irrational longer than you can remain solvent” John Maynard Keynes
This is one of the most famous investing quotes of all time from John Maynard Keynes in which he succinctly identifies what most investors have experienced: an incredulity when markets move further and longer than ever expected in one direction or another.
“Investing should be like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.” Paul Samuelson
Investing successfully frequently means holding stocks for the long-term and there is little excitement in that, but that’s okay because when your Roth IRA or traditional IRA growth is compounding over the long-term, you’ll have a larger nest-egg at retirement.
“Rule No. 1: Never lose money. Rule No. 2. Never forget rule No 1” Warren Buffett
This tongue-in-cheek investing quote from Warren Buffett has some deep wisdom hidden under the surface.
If you understand the value of companies, you will know what the downside risk is to an investment. And if you minimize that risk, you can mitigate the chances of losing money, which should be your top priority.
“People don’t like the idea of thinking long-term. Many are desperately seeking short-term answers because they have money problems to be solved today” Robert Kiyosaki
If you could receive $85 now or $100 in a year, which would you choose?
If you think rationally about whether you could generate $15 of profit in a year for every $85 you receive, you would realize it’s not an easy task. Rationally, it’s smarter for most people to choose $100 in a year’s time.
But research shows that most people select the $85 today because they like the idea of pocketing the money today rather than waiting for more tomorrow, even if most people would be unable to successfully invest $85 and turn it into $100 in one year.
Focus on investing for the long-term and your wealth in the future is likely to be greater than would otherwise be the case if you paid heed only to short-term stock market swings.
“The investor’s chief problem – even his worst enemy – is likely to be himself” Benjamin Graham
We humans have cognitive biases that influence our decision-making, sometimes to our detriment. For example, confirmation bias is a bias humans have which leads them to seek out data that supports their decisions and avoid data that conflicts with those decisions.
The endowment effect is another human propensity that can lead to dangerous outcomes when investing. The endowment effect reveals that when you own something, you value it more than you otherwise would. So when you hold a stock it might be more valuable to you than if you had not purchased it, meaning you’re less likely to sell it too – which can lead to holding onto losing positions too long.
“Sometimes buying early on the way down looks like being wrong, but it isn’t” Seth Klarman
If buying a stock when it goes lower is akin to buying an item at a store on sale, then it’s not poor decision-making if you see it go further on sale, you still got a deal, you just need to have the conviction to hang on until fair value is realized.
“All you need for a lifetime of successful investing is a few big winners, and the pluses from all of those will overwhelm the minuses from the stocks that don’t work out” Peter Lynch
As obvious as it seems, a stock trading at $10 per share has limited downside – it can go no lower than zero – but it has much greater upside. Theoretically, the share price has no ceiling level. So the gains from winners can far outpace the losses from losers over the long-term.
If you are looking to invest but not sure which trading platform might be best for you, compare brokers on fees, service level, transaction costs, and securities available to trade.
“Bottoms in the investment world don’t end with four-year lows; they end with 10- or 15-year lows.” – Jim Rogers
This quote speaks to the idea of hanging in there when your stock appears to be bottoming out.
Some investors panic and sell as soon as they see a stock start to fall, fearful they’ll lose more money if they hold onto it. But the reality is that stocks fluctuate all the time and a temporary dip – even if it seems more like a nose-dive – means nothing.
A 10 to 15 year decline/low really could lose you money, but these types of crashes are exceedingly rare. So if a stock you put money into seems to be falling, wait it out.
Most likely, the stock will rise again soon and ultimately you’ll end up making a lot more money than you would if you sold at the first sign of trouble.
One caveat: research your stocks before you invest so that you can have confidence that your investment is sound even during low periods like this.
“Invest in yourself. Your career is the engine of your wealth.” – Paul Clitheroe
It’s easy to get caught up in the excitement of investing in other companies and neglect yourself and your own business. Don’t do that.
Make sure you are cultivating your skills and talents so that you can maximize your earnings while you are also investing in other companies.
In addition, you should study investment strategies and view investing as a skill set you can learn rather than a matter of luck.
This will help you make sound investments instead of investing on a whim or blindly following the advice of a financial advisor who may or may not know what they are talking about.
“Every once in a while, the market does something so stupid it takes your breath away.” – Jim Cramer
Although learning about the stock market and following sound advice gives you the best chances of earning money through investments, there are no guarantees.
Sometimes a stock that you expect to grow will tank or vice versa. It’s important not to let these types of unpredictable events throw you off.
Keep an eye on what’s happening, ride it out if a stock is temporarily underperforming, and sell stocks that are chronically performing lower than expected so that they don’t drag your entire portfolio down.
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