As you'll see in No. 47 on my list, it's very important to step back and gain perspective. In an attempt to stop making the same mistakes over and over, here's my attempt to codify the 100 lessons I've learned in my investing career so far.
1. Most of this list is dedicated to insight on beating the market, but know this: It's darn hard to beat the market. Ninety-nine percent of people are best served steadily buying and holding low-cost index funds at the core of their portfolios -- and I may be understating that 99% figure.
2. Looking for a one-stop index-fund core? For a very reasonable 0.2% in fees a year, Vanguard target date retirement funds will automatically diversify and balance the stock and bond portions of your portfolio -- just pick your retirement date. The Vanguard family of index funds is what I recommend to just about everyone who asks.
3. Being contrarian doesn't just mean doing the opposite. The "contrarian" street-crosser gets run over by a truck.
4. In any financial matter, find out what the other person's incentives are. Discount accordingly.
5. Even a gut investment call should have some numbers to back it up.
6. Mistakes made in your 20s are better than mistakes in your 50s. Mistakes involving $100 are better than mistakes involving $100,000.
7. My all-time favorite Warren Buffett quote: "We like things that you don't have to carry out to three decimal places. If you have to carry them out to three decimal places, they're not good ideas."
8. Never buy stocks on margin, no matter how "can't miss" the opportunity is. That blend of leverage and arrogance is exactly what gets Wall Street in trouble. The difference is that we're not too big to fail.
9. Don't waste time mastering things that simply don't work (see lessons 10 through 12).
10. Example No. 1: day trading. Like playing roulette, you'll have some victories, and you may be able to fool yourself into thinking you're skillful. The house just hopes you keep playing.
11. Example No. 2: technical analysis. The only chart pattern worth noting is the jagged, but likely downward-sloping line of your savings if you follow this technique.
12. Example No. 3: leveraged ETFs. Bastardized ETFs like the Direxion Daily Financial Bull 3X (NYSE: FAS) are another great way to lose money. Even if you guess right on direction, the mathematics of the daily reckoning mean these instruments are long-term losers.
13. Stock stories about growth potential (e.g., tech stocks) are sexier than stock stories about track record (e.g., consumer goods stocks). Only the latter are verifiable today, though.
14. Having a strong opinion (let alone acting on it) is overrated. Knowing 20 stocks cold beats being able to challenge Jim Cramer in the lightning round.
15. Albert Einstein allegedly declared compound interest "the most powerful force in the universe." High-interest credit card debt aims that force at your wallet. To get compound interest pointed in the right direction, save (and invest) early and often!
16. A casino makes us use chips in lieu of cash, partially because we forget that the chips represent real money. Stocks may act in screwy ways and invite us to play games, but as investors we can't lose sight of the fact that stocks represent real companies. As Peter Lynch puts it using a different gambling analogy, "Although it's easy to forget sometimes, a share is not a lottery ticket ... it's part-ownership of a business."
17. When talking to other investors, have your BS detector handy. When you hear their "big fish" stories, know that their brilliant track records likely have more to do with selective memory and poor scorekeeping than skill.
18. A great Buffett reason not to fudge our taxes: "We'll never risk what we have for what we don't have and don't need."
19. Those who know what they're doing make complexity seem simple. Folks who don't (or are trying to sell you something) make simplicity complex.
20. A clear sign of the latter: jargon.
21. Asset allocation is more important than stock picking. A silly example: Say you're holding a race among five horses and five human beings. Many investors spend their time trying to rank the five human beings, when they're better off just betting on the five horses.
22. If you don't understand it, don't buy it until you do.
23. Sigh -- hard work is required to beat the market. Per Peter Lynch: "The person that turns over the most rocks wins the game. And that's always been my philosophy."
24. On the plus side, the results of hard work can be breathtaking. In his book Outliers, Malcolm Gladwell gives example after example of people we term "geniuses" who are really hyper-dedicated people who work at their craft relentlessly. Among the examples he uses are Bill Gates and the Beatles. He argues that both got to where they got because of the opportunity (and inclination) to hone their skills for 10,000 hours. That's the equivalent of five full years of work -- or 1,000 weeks of practicing 10 hours a week.
Gates had access to an ultra-high-end computer terminal because his exclusive middle school started a computer club. In high school, his access went up a notch as he gained access to the computers at the University of Washington. He talks of getting 20 to 30 hours of programming time in each weekend. On weeknights, he'd slip out of his house to take advantage of the open time-sharing slots from 3 a.m. to 6 a.m. And the Beatles were just as obsessed. By the time they broke out on the Ed Sullivan show in 1964, the Beatles had played an estimated 1,200 shows, some lasting eight hours!
25. None of the time spent checking and rechecking Yahoo! Finance portfolios counts toward those 10,000 hours. And here's the real kick in the groin: 10,000 hours is a prerequisite for mastery -- not a guarantee.
26. Common sense is as uncommon in investing as it is in real life.
27. One of my favorite lessons from the poker table: Action is overrated. The best players (and investors) are constantly weighing the opportunities, but rarely are they moved to act.
28. A similar sentiment by Vanguard founder Jack Bogle: "Time is your friend; impulse is your enemy."
29. Selling is overrated. Reason No. 1: We often sell potential multibagger winners that would more than make up for our losers. The greater the quality of the business, the greater the danger of selling too early.
30. Selling is overrated. Reason No. 2: Outside of retirement accounts, selling kicks in voluntary taxes.
31. Selling is overrated. Reason No. 3: Fees.
32. In the hands of a good storyteller, almost every stock looks like a winner. Assume you're not hearing the whole story.
33. A question to ask before buying a stock: "What's my competitive advantage on this stock? Do I really know something the market doesn't?" The more specific the advantage, the better.
34. Sweat the big stuff.
35. Most of us are too enamored with "so you're saying there's a chance" opportunities. A Hail Mary belongs on the gridiron or in the pew -- not in the brokerage account.
36. A great rule of thumb for buying a house (the biggest single investment most of us will ever make), from fellow Fool Buck Hartzell back in 2005: "If a home is selling for 150 times the monthly rent (or less), it's generally a good deal. If it's selling for more than 200 times the monthly rent of a comparable property, you're better off renting."
37. One of the toughest facts about investing is that a proper track record takes decades. Charlatans can do quite well for years and years. This is potentially dangerous for our assessment of ourselves and of others. Focusing on process, rather than results, helps.
38. Price matters. A great company can be a great big loss for you if you pay too much.
39. When applicable, use the tax system to your advantage. Retirement accounts like 401(k)s and IRAs can be huge boons.
40. It is twice as easy to sound intelligent being pessimistic about the future as it is being optimistic.
41. Greater risk theoretically yields greater reward, but a stupid investment is just a stupid investment.
42. Sir John Templeton's quote: "'This time it's different' are the four most expensive words in the investing language." The details change, but the basic storylines remain the same.
43. Investing shouldn't be improv. Take the time to write a thoughtful script.
44. A key Buffett quote to understand: "Time is the friend of the wonderful company, the enemy of the mediocre." Why is this so? Partially because "you only find out who is swimming naked when the tide goes out." I really struggle to abide by this advice. I am often the Statue of Liberty when it comes to investing in inferior companies on the cheap: "Give me your tired, your poor, your huddled masses," etc.
45. Options promise big gains in short time periods. The problem? About three out of every four expire worthless. Contrast that with a stock, which doesn't expire.
46. Sorry, market timers: Take it from Peter Lynch, who said, "If you spend more than 13 minutes analyzing economic and market forecasts, you've wasted 10 minutes." Or fellow investing great Ralph Wanger: "If you believe you or anyone else has a system that can predict the future of the stock market, the joke is on you." Or the godfather of value investing, Benjamin Graham: "It is absurd to think that the general public can ever make money out of market forecasts."
47. Keep a journal (or spreadsheet) of your stock picks, complete with your rationale for each move. Then look back on it to see if you were right. We may think we're good dressers, but all it takes is a high-school yearbook to prove otherwise.
48. Step aside, high blood pressure: Inflation is the silent killer.
49. Diversification doesn't entail making a whole bunch of dangerous investments and hoping they cancel out. That's the financial equivalent of stabbing your leg to cure your flu.
50. 13 Steps to Investing Foolishly is excellent.
51. Index ETFs may be the most wildly misused products in the stock market. They are excellent tools for ultra-low-cost buy-and-hold diversification, but many use them to day-trade the market (and sectors thereof).
52. Somewhere around 80% of actively managed mutual funds (as opposed to broad index funds) don't beat the market.
53. The more we learn about investing, the more we want to start doing exotic things (naked straddle options, anyone?) and buying stock in obscure companies no one has heard of. Maybe it's boredom, maybe arrogance, or maybe the desire to impress people at parties. Or perhaps it's seeking the glory of being right when few saw it coming. I'm guilty as charged on all counts. When I'm at risk of going off the deep end, I try to remember that stock picking isn't diving. As Buffett has noted, there are no extra points (or returns) for degree of difficulty.
54. This Einstein maxim is spot-on for stock analysis: "Everything should be made as simple as possible, but no simpler." Both clauses are crucial.
55. Just because a company or industry is set to change the world doesn't mean it's a great investment. Beyond looking at valuation, there tends to be a Wild West of players until a few winners emerge. In fact, market beater Ralph Wanger says, "Since the Industrial Revolution began, going downstream -- investing in businesses that will benefit from new technology rather than investing in the technology companies themselves -- has often been the smarter strategy."
56. Jumping from one flavor of the day to the next isn't continuous learning.
57. Long-tail events (a.k.a. black swans) are highly underrated. Nassim Nicholas Taleb explains it best in his book, Fooled by Randomness.
58. Every time I start getting cocky (which is often), I am unceremoniously reminded there are no sure-thing stock picks. As master investor T. Rowe Price noted: "No one can see ahead three years, let alone five or ten. Competition, new inventions -- all kinds of things -- can change the situation in twelve months."
59. I personally get way too excited when a stock hits its 52-week lows or falls 50%. Many sins are washed away in my mind when I see a bargain, but price movement by itself is not a sufficient reason to buy (or sell). Falling knives can be death -- especially when they're rusty and gross.
60. A related point: No one consistently times the bottom or top of a stock's price (let alone the market of stocks!).
61. Don't let the false modesty of investing greats fool you into false confidence.
62. My three strikes against gold. Strike one: Its value can't be estimated with basic math (since it just sits around producing nothing). Strike two: Wharton professor Jeremy Siegel showed that going back to the 1800s, the return on gold has barely kept up with inflation and is left in the dust by stocks and bonds. Strike three: Gold as a doomsday investment doesn't make much sense. If the apocalypse (financial or otherwise) actually comes, you're probably screwed regardless.
63. Discount cash on a company's balance sheet. Managements are brilliant at squandering it.
64. Done properly, value investing -- e.g., focusing on low-P/E, low-P/B, low-TEV/EBITDA stocks for ideas -- has proven to work quite well. But as successful growth-investor Bill O'Neil warns, "What seems too high and risky to the majority generally goes higher, and what seems low and cheap generally goes lower."
65. You may be too smart to be rich.
66. Know thyself. Know your weaknesses and strengths. Here's a specific example from Joel Greenblatt: "For most people, stocks should represent a portion of their investment portfolio because I still believe that over the long term they will provide superior returns relative to most alternative investments. However, whether that portion of an investment portfolio devoted to stock investments should be 40% of an investor's portfolio or 80% is a very individual decision. How much are you willing (or able) to lose before you panic out? There's no sense investing such a large portion of your assets in a long-term strategy if you can't take the pain when your chosen strategy doesn't work out for a period of years."
67. For some help on getting to know yourself, study the common mistakes behavior finance experts have uncovered.
68. Folks say that "success has many fathers, while failure is an orphan." Combine that with our willingness to overvalue streaks owing to one event, and I start to wonder: Do we overvalue managers that leave a successful organization to turn around a woeful organization?
69. If you just heard of the company yesterday, don't buy its stock today.
70. The Internet and better regulations have largely eliminated data advantages. The problem now is isolating which data is actually meaningful. Better results stem from increasing the signal-to-noise ratio.
71. Even if you rely on advice from others, heed the words of bond fund legend Bill Gross: "Finding the best person or the best organization to invest your money is one of the most important financial decisions you'll ever make." As with stocks, familiarity alone isn't protection. Check out our seven-part special report on financial advisors.
72. Stuff that leads to suckerdom: greed, laziness, unearned trust, ignorance, and shortcuts. When in doubt financially, do the opposite of your favorite athlete.
73. Make sure to get the right odds. There should be a vast difference between what we pay for a has-been or never-was and what we pay for a potential superstar company. As George Soros puts it, "It's not whether you're right or wrong that's important, but how much money you make when you're right and how much you lose when you're wrong."
74. Initial valuation matters, but generally, over longer periods of time (decades, not years), stocks have returned more than bonds. The more decades you have left, the more of your portfolio should be in stocks to stave off inflation.
75. In theory, well-timed share buybacks are better than dividends. They save on taxes and allow the people who know the company best to buy up shares when the market acts crazy. In practice, I'll take dividends. (A tangential bonus fact: Dividend stocks have historically beaten non-dividend stocks).
76. Some of the most misinterpreted words in investing: Peter Lynch's "Buy what you know." It's more like "Research what you know and then consider buying."
77. Don't be an Enron baby. Overweighting your investments in the company you work for is a double-down bet we don't need to be taking. On the other hand, your company's 401(k) match is free money.
78. There are many paths to the top of the investing mountain, but some are more fraught with peril -- and there are very few trailblazers.
79. Numbers frequently lie -- especially in isolation. Say you spot a P/E ratio of eight. Sounds darn cheap! But is that industry's profitability rapidly deteriorating? Was there a one-time item that temporarily juiced the bottom line? Is an upstart competitor hungrily eyeing its lunch? Are new regulations threatening its livelihood? Is it a cyclical industry? Is it in a country that has a really poor reputation for accounting fraud or government interference? You get the idea.
80. Mergers and acquisitions are overrated. Somewhere between 50% and 85% of mergers fail to boost value. The frequency of achieving promised "synergies" should be filed somewhere between unicorns and no-hitters.
81. It's hard to be an independent thinker when the pressures to conform are daily and good investment theses can look ugly for years before paying off. Ben Graham said it this way: "Even the intelligent investor is likely to need considerable willpower to keep from following the crowd." Famed investor John Templeton talked of his defense against crowd-following: "When asked about living and working in the Bahamas during his management of the Templeton Group, Templeton replied, 'I've found my results for investment clients were far better here than when I had my office in 30 Rockefeller Plaza. When you're in Manhattan, it's much more difficult to go opposite the crowd.'" The digital equivalent today is turning off real-time news and Internet feeds and reading more thoughtful analysis.
82. The best book I've ever read on the basics of stock picking: Joel Greenblatt's The Little Book That Still Beats the Market. It's literally written so that a small child can understand it. It also does a great job of explaining why return on capital is a measure to pay attention to.
83. It's not the rewards you don't understand that'll burn you, but the risks you don't understand.
84. The guy who invented the P/E ratio (James Slater) on small caps: "Most leading brokers cannot spare the time and money to research smaller stocks. You are therefore more likely to find a bargain in this relatively under-exploited area of the stock market." Of course, because there is less interest and less Wall Street coverage, doing your own due diligence is that much more important. The same holds for other underfollowed areas of the market, like special situations.
85. If you can learn quickly from your own mistakes, you're ahead of the game. If you can learn quickly from others' mistakes, you've won the game.
86. Jim Sinegal of Costco on why you can't pay too much attention to Wall Street: "You have to recognize -- and I don't mean this in an acrimonious sense -- that the people in that business are trying to make money between now and next Thursday. We're trying to build a company that's going to be here 50 and 60 years from now."
87. If it seems too good to be true...
88. Buffett's concept of the "circle of competence" is important: "There are all kinds of businesses that I don't understand, but that doesn't cause me to stay up at night. It just means I go on to the next one, and that's what the individual investor should do." Also consider Steve Jobs' quote: "Focus is about saying no." For a great book on saying no, read Seth Godin's tiny book The Dip.
89. The stock moves I've made based solely on the advice of others -- e.g., "He's a good energy analyst and he loves this oil stock," or "This famous stock picker is buying X!" -- have generally been disasters.
90. If you can read a dissenting opinion without resorting to an ad hominem attack, you're at an advantage.
91. Downer alert: We like control, but we can't control everything. Life and luck can (and will) trump investment plans. You can do everything right and still die penniless. All we can do is give ourselves a better chance to succeed.
92. That said, if you're reading this article, there's a good chance the genetic lottery has smiled favorably upon you.
93. Here's something to think about the next time you get antsy to buy immediately into the latest must-act-now opportunity (e.g., a hot IPO). The year 1986 marked Coca-Cola's 100-year anniversary. If you had bought shares to commemorate the occasion, you'd be sitting on something like 15 to 20 times your initial investment. Time waits for no man -- but stocks will.
94. How can we get rich? Per Ohio State economics professor Jay Zagorsky: "Staying married, not getting divorced, [and] thinking about savings." To those, I would add having the proper insurance coverage.
95. There are more than 5,000 stocks on major U.S. exchanges. A great stock picker finds one great stock idea a year. Don't let the ones that got away frazzle you into buying the ones you should have ignored.
96. The Pink Sheets and over-the-counter markets are where sketchy penny stocks live. Do yourself a favor and stick to stocks on major U.S. exchanges -- preferably ones with market caps of more than $200 million. And never, ever heed penny stock spam emails.
97. When I learned to drive, I nervously focused on each upcoming parked car. My father told me to focus down the road and the parked cars would take care of themselves. Perhaps my first lesson in investing.
98. Do not buy low and sell high; rather, buy low and don't sell often.
99. For the penultimate lesson, let's turn once more to Warren Buffett, who briefly said in his 2004 shareholder letter what took me 98 bullet points to say:
Over the 35 years, American business has delivered terrific results. It should therefore have been easy for investors to earn juicy returns: All they had to do was piggyback Corporate America in a diversified, low-expense way. An index fund that they never touched would have done the job. Instead many investors have had experiences ranging from mediocre to disastrous.
There have been three primary causes: first, high costs, usually because investors traded excessively or spent far too much on investment management; second, portfolio decisions based on tips and fads rather than on thoughtful, quantified evaluation of businesses; and third, a start-and-stop approach to the market marked by untimely entries (after an advance has been long under way) and exits (after periods of stagnation or decline). Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy only when others are fearful.
100. Despite my best efforts, I will repeatedly and thoroughly fail to heed these lessons. Let's hope you're better at No. 85 than I am.