3 Ways to Be a Better Investor You Won't Learn in a Book
I was a high school senior, enrolled in a half-semester economics course, when our teacher signed us up for a nationwide investing contest for high school seniors, in which we were to invest a fictitious $100,000. The student who generated the largest gain would "win."
I didn't win. Nor did I expect to, with barely any knowledge of how businesses or the stock market worked. But I placed in the top 20 in the country thanks to my sole holding -- Oregon Metallurgical -- being bought out for a substantial premium. When I realized I could do this with real money, my love of investing was born.
What You Don't Know Matters a Lot
Throughout the next decade, first as a day trader during my early investing years, then eventually as a registered investment adviser, I taught myself everything I believed there was to know about investing. I immersed myself in investing books, spent hours perusing financial websites and reading earnings reports and engaged in as much investment community banter as I could.
But little did I know there was much, much more to learn about investing than I ever imagined. And only through nearly two decades of investing experience have I discovered that there are more than a handful of ways you can become a better, smarter investor -- and that some of the most important lessons are learned through experience. Here are three that I've learned:
1. Set Investing Goals -- and Then Prepare to Reset Them
Imagine this scenario: You and your family sit down for a talk with your financial adviser and devise a 10-year financial plan. Practically every detail is covered, including how you'll add to your retirement nest egg on a monthly basis, how you'll fund your children's education, and what dollar figures and growth metrics you should aim to hit. The boundaries of success are firm, and you'll either surpass them or fall short.
The above scenario plays out countless times. I should know, since this is what I used to do for a living. But have you really succeeded if you surpass an investing goal devised 10 years ago? Conversely, does falling short of your investing goal mean you've failed?
The answer is almost always no. Goals are a moving target and are subject to much more complexity than simply the amount you invest and the growth you achieve. Many factors in your life are dynamic. Income, marital status, family size, medical expenses and home ownership are all some of the most common major ones that are prone to change and that can drastically alter your ability to save and invest. This, in turn, can shift the expectations of your investment goals up or down.
The lesson is that your financial goals -- and you -- need to remain flexible. Real-life investing goals are moving targets that will require you to be able to spot when changes are needed and be willing to make the necessary adjustments. Remember, you're not competing against Warren Buffett for who can have the most cash in the bank. Instead, you're investing for a future and lifestyle that's unique to you.
2. Embrace Naysayers and Contrarians
People are often their own worst critics, but they generally shy away from the criticism of others. That's why it's only natural for us to want to surround ourselves with friends who share common interests and have somewhat similar views. However, when it comes to investing, this can be very dangerous.
It is said that a contributing factor to the late Steve Jobs' success at Apple (AAPL) was that he was not afraid to surround himself with people who disagreed with him and had the courage to give him honest criticism and feedback.
It's advice that can easily be applied to your investing strategy. After all, you are the CEO of your own financial destiny.
If you surround yourself with like-minded people who only agree with everything you say, it's nearly impossible to grow as an investor. However, if you're willing to examine both sides of the coin, you'll have the opportunity to take your knowledge of investing to a deeper level by exploring your convictions.
3. Reread Between the Lines of Your Favorite Investing Books
Looking back, it's been about 15 years since I first read Burton Malkiel's "A Random Walk Down Wall Street." Throughout his book, Malkiel preaches one of the core philosophies of investing success: that it's impossible to predict future stock price movements, and that a strategy of buy-and-hold gives investors their greatest chance of long-term success. This is an ethos I live by today -- but it wasn't always that way.
There was a period during college and shortly thereafter where I made a living as a day trader, jumping in and out of stocks, sometimes just to make pennies at a time. The lesson I learned from "A Random Walk" had become a distant memory because I assumed that reading the book and placing it upon my bookshelf made me knowledgeable.
But after rereading "A Random Walk" in 2005, and practically every year since, I realized I had been doing myself a disservice all these years, as I was discovering something new or applicable each time I reread it.
Now I'm constantly refreshing my mind with its core investing concepts, adding new perspective to my dynamic investing situation and applying what I've learned following rereading the book.
The point is that if you read to gain knowledge and simply allow that book to gather dust on your bookshelf, you're denying yourself the ability to gain new perspectives and, most important, the chance to apply those ideas to your own unique situation.
Motley Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on Twitter @TMFUltraLong. The Motley Fool owns shares of and recommends Apple.