Editor’s note: This article was first published in December 2013 and draws on a 2012 column; Apple’s $700 share price predates the 2014 and 2020 stock splits, ’12 years ago’ means around 2000, ‘the next decade’ means the 2010s, and the TV market coverage hours are 2012 figures.
There’s a lot of complex investing advice out there, yet we sometimes forget very basic concepts or truths. Morgan Housel, an economist who writes for Fool.com, put together a superb summary listing 50 unfortunate truths about investing, and we’ve picked 18 of them.
Truths about investing in the stock market
-
The gap between a great company and a great investment can be enormous. (Apple is a great company, but buying at $700 a share wasn’t a very good investment.)
-
In finance there are experts who have been wrong about everything for years and still draw the crowds.
-
In professional tennis, 80% of points are won, whereas in amateur tennis 80% of points are lost. Whether we’re talking about chess, wrestling or investing, beginners should focus on avoiding mistakes, while experts should focus on the big moves.
-
There are tens of thousands of professional money managers. Statistically, many of them have succeeded through sheer luck or chance. Which ones? No idea, but I’d bet some of them are very famous.
-
Many of the investors we call “legendary” barely have a legend at all. On Wall Street, generating great wealth is no sign of great returns. (In other words, the manager of an investment fund with 100 billion under management and very poor returns will generate far more wealth than a fund manager with 1 billion under management and spectacular returns.)
(Read: Probably the mother of all stock market investing mistakes)
-
Not a single person in the whole world knows what the market will do in the short term. End of story.
-
The analyst who talks about his mistakes is the kind of analyst you should listen to. Avoid the one who never mentions his mistakes, because they must be huge.
-
Thirty years ago there was one hour of television for every market day. Today there are more than 18. What has changed isn’t the volume of news but the volume of nonsense.
-
Most of what’s taught about investing at school or university is theoretical nonsense that’s useless in the world of real investing. That’s why so few professors are rich.
-
Most market news isn’t just useless; it’s also harmful to your financial health.
-
Professional investors have better information and much faster computers and software than you do. You will never beat them at short-term trading. Don’t even try. (As we’ve said before, if you trade, you’ll lose in the long run. The only people who win with trading are the ones who teach you how to do it, the ones who charge you a commission on every trade, and the giants who sweep away the positions of thousands of “little guys” like you.)
(Read: What I learned from Keynes about investing)
- Professional investing is one of the hardest careers to succeed in, but it has few barriers to entry. That’s why it produces legions of experts who have no idea what they’re doing.
See also: The difference between CDs and ETFs
-
The world’s best investors have more of an edge in psychology than in finance.
-
If you have credit card debt and you’re thinking of investing some money, stop. You’ll rarely earn returns higher than a credit card’s annual interest rate.
-
The odds that at least one large, well-known company is insolvent and hiding behind fraudulent accounting are high.
-
Twelve years ago, General Motors was on top of the world while investors laughed at Apple. A similar reversal will happen in the next decade, but nobody knows which companies it will involve.
-
Remember Buffett’s words: “First come the innovators, then the imitators, then the idiots.” Be careful not to be the idiot when you invest.
-
The most boring companies (soft drinks, toothpaste, food and so on) can be the best long-term investments, and the most innovative ones the worst.
Featured image: Patricia Drury, CC BY 2.0, via Wikimedia Commons.
