A few months ago I sat down and contemplated what I’ve learned about investing over the 30 years I spent as a professional. What I came up with is what I call my “Noble Truths” of investing. These are my deepest beliefs. Some I learned from great thinkers in the business, while others I learned from experience. They have served me well, and I hope you get one or two new ideas from them.
• If you don’t know who you are, the market is an expensive place to find out.
• A killer strategy won’t help you much unless it suits your personality.
• Unrealistic expectations lead to chronic frustration and disappointment.
• Set up your strategy, then let the market come to you.
• Embrace uncertainty because that’s where the real opportunity lies.
• Imagine what’s possible; plan on what’s probable.
• Be selective about where you get your information.
• Be skeptical about anything you get from someone who has an agenda.
• Everyone has an agenda.
• Investing is risky; not investing is financial suicide.
• Knowing your limitations is the beginning of wisdom.
• Costs matter more than you think.
• It’s possible to beat the market, but the odds are terrible.
• Don’t follow leaders. Watch the parking meters.
Investing well is damn hard, so prepare yourself
• Understand the theory of investing
• Understand the psychology of investing
• Understand the business of investing
• Understand your own assumptions and expectations
• Understand your own biases and limitations
• Use the above to build your strategy
Some random pearls of wisdom
The average investor operates at about 70% efficiency. The 30% that they leave on the table is due to weak decision skills, poor risk management, bad timing, high costs, and inadequate planning.
For most (but not all), trying to beat the market is a losers game.
Mutual fund investors think they can pick future winners. They can’t.
The arithmetic of investing is obvious, yet most investors don’t see it.
It contradicts their beliefs, biases, and acceptance of conventional wisdom.
Advisors don’t see it because they get paid not to see it.
Money flows into assets after good performance, and out when bad performance follows.
When professionals exploit the behavioral mistakes of amateurs, the result is a predictable transfer of wealth.
There are only 3 ways to beat the market:
• Enjoying a serial run of good luck
• Having an unfair advantage (cheating)
• Expending extraordinary amounts of time, effort, and money
The enemy of a good plan is the never-ending quest for a perfect plan.
The other enemy of a good plan is how easy it is to abandon under duress.
“Everybody’s got to squirrel away a little sock money for a rainy day.”
-Robert DeNiro in Freelancers
Earnings are not volatile. How much investors are willing to pay for earnings is volatile.
In each 10 year period, about 30% of mutual funds beat the market. But it’s not the same 30% every year. Can you identify them ahead of time?
The most successful managers get noticed, which brings in lots of money, which in turn makes it harder for them to continue beating the market because they can no longer play at the smaller, more inefficient end of the pool.
In his classic 14th century work, The Divine Comedy, here’s what Dante had to say about soothsayers: “Those who attempt to divine the future should have their heads twisted around and be forced to walk backwards for all eternity.”