Category Archives: Investing

20 Investment Lessons from the 2008 Financial Crisis

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“Attention to risk must be a 24/7/365 obsession, with people – not computers – assessing and reassessing the risk environment in real time.” ~ Seth Klarman

At an early age, Billionaire and Baupost Capital CEO Seth Klarman was fascinated with business and making money.  By the age of ten he was investing in the stock market. 

During Klarman’s time in the investing world, he’s been able to compound capital at a 20% annual return. 

In 1991 Klarman wrote his book, Margin of Safety, and there have only been 5,000 copies printed.  As a result of such a small supply and enormous demand, Klarman’s book is very expensive reselling for $1,500 to $2,500.

James Clear — who writes about habits, decision making, and is the author of the #1 New York Times bestseller, Atomic Habits — summarizes the book, Margin of Safety, as follows:

“Avoiding loss should be the primary goal of every investor. The way to avoid loss is by investing with a significant margin of safety. A margin of safety is necessary because valuation is an imprecise art, the future is unpredictable, and investors are human and make mistakes.”

2010 Baupost Capital’s annual letter

Here is an excerpt from the 2010 annual letter of Baupost Capital written by Seth Klarman. He was shocked at how quickly investors have returned to the risky investing and financial behaviors that got them in trouble during the 2008 Financial Crisis;

1. Things that have never happened before are bound to occur with some regularity. You must always be prepared for the unexpected (the Black Swan) event, including sudden, sharp downward swings in markets and the economy. Whatever adverse scenario you can contemplate, reality can and will be far worse.

2. When excesses such as lax lending standards become widespread and persist for some time (e.g., ninja (no income, no job and no assets) loans), people are lulled into a false sense of security, creating an even more dangerous situation. In some cases, excesses migrate beyond regional or national borders, raising the ante for investors and governments. These excesses will eventually end, triggering a crisis at least in proportion to the degree of the excesses. Correlations between asset classes may be surprisingly high when leverage rapidly unwinds.

3. Nowhere does it say that investors should strive to make every last dollar of potential profit; consideration of risk must never take a backseat to return. Conservative positioning entering a crisis is crucial: it enables one to maintain long-term oriented, clear thinking, and to focus on new opportunities while others are distracted or even forced to sell. Portfolio hedges must be in place before a crisis hits. One cannot reliably or affordably increase or replace hedges that are rolling off during a financial crisis.

4. Risk is not inherent in an investment; it is always relative to the price paid. Uncertainty is not the same as risk. Indeed, when great uncertainty – such as in the fall of 2008 – drives securities prices to especially low levels, they often become less risky investments.

5. Do not trust financial market risk models. Reality is always too complex to be accurately modeled. Attention to risk must be a 24/7/365 obsession, with people – not computers – assessing and reassessing the risk environment in real time. Despite the predilection of some analysts to model the financial markets using sophisticated mathematics, the markets are governed by behavioral science, not physical science.

6. Do not accept principal risk while investing short-term cash: the greedy effort to earn a few extra basis points of yield inevitably leads to the incurrence of greater risk, which increases the likelihood of losses and severe illiquidity at precisely the moment when cash is needed to cover expenses, to meet commitments, or to make compelling long-term investments.

7. The latest trade of a security creates a dangerous illusion that its market price approximates its true value. This mirage is especially dangerous during periods of market exuberance. The concept of “private market value” as an anchor to the proper valuation of a business can also be greatly skewed during ebullient times and should always be considered with a healthy degree of skepticism.

8. A broad and flexible investment approach is essential during a crisis. Opportunities can be vast, ephemeral, and dispersed through various sectors and markets. Rigid silos can be an enormous disadvantage at such times.

9. You must buy on the way down. There is far more volume on the way down than on the way back up, and far less competition among buyers. It is almost always better to be too early than too late, but you must be prepared for price markdowns on what you buy.

10. Financial innovation can be highly dangerous, (think cryptocurrency) though almost no one will tell you this. New financial products are typically created for sunny days and are almost never stress-tested for stormy weather. Securitization is an area that almost perfectly fits this description; markets for securitized assets such as subprime mortgages completely collapsed in 2008 and have not fully recovered. Ironically, the government is eager to restore the securitization markets back to their pre-collapse stature.

11. Ratings agencies are highly conflicted, unimaginative dupes. They are blissfully unaware of adverse selection and moral hazard. Investors should never trust them.

12. Be sure that you are well compensated for illiquidity – especially illiquidity without control – because it can create particularly high opportunity costs.

13. At equal returns, public investments are generally superior to private investments not only because they are more liquid but also because amidst distress, public markets are more likely than private ones to offer attractive opportunities to average down.

14. Beware leverage in all its forms. Borrowers – individual, corporate, or government – should always match fund their liabilities against the duration of their assets. Borrowers must always remember that capital markets can be extremely fickle, and that it is never safe to assume a maturing loan can be rolled over. Even if you are unleveraged, the leverage employed by others can drive dramatic price and valuation swings; sudden unavailability of leverage in the economy may trigger an economic downturn.

15. Many leveraged buyouts (LBOs) are man-made disasters. When the price paid is excessive, the equity portion of an LBO is really an out-of-the-money call option. Many fiduciaries placed large amounts of the capital under their stewardship into such options in 2006 and 2007.

16. Financial stocks are particularly risky. Banking, in particular, is a highly leveraged, extremely competitive, and challenging business. A major European bank recently announced the goal of achieving a 20% return on equity (ROE) within several years. Unfortunately, ROE is highly dependent on absolute yields, yield spreads, maintaining adequate loan loss reserves, and the amount of leverage used. What is the bank’s management to do if it cannot readily get to 20%? Leverage up? Hold riskier assets? Ignore the risk of loss? In some ways, for a major financial institution even to have a ROE goal is to court disaster.

17. Having clients with a long-term orientation is crucial. Nothing else is as important to the success of an investment firm.

18. When a government official says a problem has been “contained,” pay no attention.

19. The government – the ultimate short-term-oriented player – cannot withstand much pain in the economy or the financial markets. Bailouts and rescues are likely to occur, though not with sufficient predictability for investors to comfortably take advantage. The government will take enormous risks in such interventions, especially if the expenses can be conveniently deferred to the future. Some of the price-tag is in the form of back- stops and guarantees, whose cost is almost impossible to determine.

20. Almost no one will accept responsibility for his or her role in precipitating a crisis: not leveraged speculators, not willfully blind leaders of financial institutions, and certainly not regulators, government officials, ratings agencies or politicians.

References:

  1. https://jamesclear.com/book-summaries/margin-of-safety-risk-averse-value-investing-strategies-for-the-thoughtful-investor
  2. https://www.nasdaq.com/articles/seth-klarman-twenty-investment-lessons-should-have-been-learned-2008-crash-2013-04-13
  3. https://www.theinvestorspodcast.com/episodes/margin-of-safety-summary/

FTX Debacle and Lessons Learned

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The lessons investors can learn from the FTX debacle are not all that new or even groundbreaking. But, the lessons are important ones for investors to learn who desire to build long-term wealth and achieve financial freedom.

The significant lessons are the importance of investors understanding an asset and doing thorough research on companies in which they intend to invest.

In FTX’s case, here is a company, led by it’s under thirty CEO Sam Bankman-Fried (SBF), that in three years grew from relative nothing to $32B literally overnight. It’s meteoric rise attracted thousands of investors who were more than happy to invest their capital in a young company and its brash CEO.

Yet, by performing just basic research on how the company made its money, on the experience and acumen of the CEO, and on the executive management team, and on the company’s financial profitability would have raised red flag to cause serious investor to pause before investing their capital in the company.

Additionally, SBF, FTX’s thirty-something CEO was consider a “wunder-kid” of sorts and featured by Forbes as its #2 “The Forbes 400” in 2022.

In a relatively short time, SBF took FTX from near zero is capitalization to $32B. His feats caused both seasoned and retail investors to flock to FTX.

Now, at the beginning of the week, FTX possessed a capitalization of $32. By Friday, FTX was at near zero capitalization, SBF had resigned, and the luster and shine of the once high flying company had been completely tarnished.

Thus, this is a classic and stark example why investors must understand and do thorough research, and remain disciplined before investing their capital.

References:

  1. https://www.forbes.com/sites/jemimamcevoy/2022/09/27/10-under-40-the-youngest-billionaires-on-the-2022-forbes-400/?sh=2455189c397e

Inflation Hits Disney’s Magic Kingdom…Ticket Prices Increase

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Walt Disney World is raising the range of prices for some of its single-day, single-park tickets at Magic Kingdom, Epcot, and Hollywood Studios in Orlando, FL ~ Janet H. Cho

Families will have to splurge more for their Walt Disney World vacations starting December 8, 2022, because some single-day, single-park ticket prices at Disney’s Magic Kingdom, Epcot, and Hollywood Studios in Orlando could cost as much as $189 a person during the nine-day peak period around Christmas and New Year’s Day.

  • Single-day ticket prices to Disney’s Magic Kingdom Park are increasing to between $124 and $189 a person. The $189 ticket price is specifically for that peak holiday season around Christmas and the new year, and not all year, the Disney spokesperson told Barron’s.
  • Single-day tickets to Disney’s Animal Kingdom are staying at the current $109 to $159 range for visitors ages 10 and up.
  • Single-day tickets to Epcot are increasing to a range of $114 to $179; and
  • Single-day tickets to Hollywood Studios are increasing to $124 to $179.
  • Instead of the current system, which lets visitors make their theme park reservations only after buying their tickets, the new single-day tickets automatically include theme park reservations. The price of the Park Hopper option that lets people visit a second park the same day for $65 more is also changing.

What’s Next: Except for renewals by current annual pass holders, Disney has paused new sales of all but its Pixie Dust annual passes, available to FL residents only, which are staying at $399 a person. It is raising the price of its other annual passes, including the Incredi-Pass, which is going up to $1,399.

Under a separate program, discounted multiday tickets for active or retired members of the U.S. military, their families and friends, are increasing by $20 to $369 plus tax a person for the five-day ticket package plus Park Hopper, or $349 plus tax a person for the four-day package.

Disney also added more blackout dates when military tickets aren’t eligible, including around Christmas and New Year’s this year, and around spring break and Thanksgiving next year.

References:

  1. https://www.barrons.com/articles/disney-visits-will-cost-more-in-florida-51668627930

Value Investing

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Value investing involves determining the intrinsic value — the true, inherent worth of an asset — and buying it at a level that represents a substantial discount to that price.

The gap between a stock’s intrinsic value and the price it is currently selling for is known as the margin of safety.

The greater the margin of safety, the more an investor’s projections can be off while still profitably gaining from an investment in the shares of the company being evaluated.

It can be helpful to ensure you understand what value investing is and is not. It is not searching for stocks with low price-to-earnings ratios and blindly buying the stocks that make that first cut. Instead, value investors employ a series of metrics and ratios to help them determine a stock’s intrinsic value and a sufficient margin of safety.

Value investing in stocks often means looking for mispriced shares in out-of-the-way places. This can include looking at companies in out-of-favor sectors, businesses in frowned-upon industries, companies that are going through some type of scandal, or stocks currently enduring a bear market. Unpopular sectors and companies are often treasure troves for the successful value investor, requiring the possession of both a long-term approach and a contrarian mindset. Regardless of where the investments come from, though, value investing is the art and science of identifying stocks priced below their actual worth.

Successful value investing exercise patience and hold during lean times. Taking just one example, in early 2015, American Express shareholders learned that AmEx lost its exclusive credit-card deal with Costco Wholesale locations. In the following months, Amex lost almost 50% of its market-cap value. Yet far from being a moment to panic, savvy investors might have seen an opportunity to buy AmEx for outsized gains. Within three years of its lowest point, American Express had almost doubled and reached new all-time highs.

Selling at lows while negative sentiment is at its highest will guarantee frustration and permanent loss of capital. It can be hard to wait while your thesis plays out, but patience is absolutely necessary for value investors who want to beat the market.

Of course, value investing is more than a waiting game. Investors must remain diligent in staying up to date on a company to ensure their thesis is proceeding as planned. This means paying attention to the company’s business performance — not its stock price.

The Big 5 Numbers 

Phil Town, founder and CEO of Rule #1 Investing, says there are “the big 5 numbers” in value investing.

The Big 5 numbers are:

  1. Return on Invested Capital (ROIC)
  2. Equity (Book Value) Growth
  3. Earnings per Share (EPS) Growth 
  4. Sales (Revenue) Growth
  5. Cash Growth

All the big 5 numbers will be 10% or greater if the company, and he numbers should be stable or growing over the past 10 years. 

The big takeaway

Value investing is not easy. It requires time, focus, discipline, patience and dedication to the craft. It will often mean looking and feeling foolish while you wait for an investment thesis to play out. If this doesn’t sound like it’s for you, investing in passive index funds is a perfectly suitable alternative.

For investors who enjoy the hunt of looking for undervalued assets — and beating the market at its own game — value investing can be richly rewarding in more ways than one. By following this simple guide, investors can be well on their way to understanding how value investing can beat the market.

References:

  1. https://www.foxbusiness.com/markets/how-to-be-a-successful-value-investor
  2. https://wp.ruleoneinvesting.com/blog/how-to-invest/value-investing/
  3. https://valueinvestoracademy.com/i-read-rule-1-by-phil-town-heres-what-i-learned/

Value Investing: The 4 Ms of Investing

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“The one and only secret to stockpiling is to make sure the value of the business is substantially greater than the price you are paying for it. If you get this right, you cannot help but get rich.” ~ Phil Town

Value investing is a strategy that focuses on investing in individual assets, but not just any asset, assets in wonderful companies or real estate that are priced well below their value, explains Phil Town, founder and CEO of Rule 1 Investing.

Value investing aims to reduce risk by increasing understanding of what you’re investing in order to make wiser investment decisions, and purchasing it at a price that gives you a margin of safety.

  • Value investing is a focused, disciplined and patient strategy, it’s a buy-and-hold for the long-term strategy. You need to be disciplined, patient and keep your focus on long-term profits.
  • It’s about making investing decisions based on the intrinsic value of a company, or what it’s actually worth, which is not to be confused with its sticker or market price.
  • A key component of value investing is buying stocks at the right time, and the right time will present itself if you remain focused, disciplined and patient.
  • The value investor isn’t swayed by the general public’s reaction or market fear. Fear can make people sell too early or miss an excellent opportunity to buy. But, the value investor decides when to buy or sell based on a wonderful company’s intrinsic value, not based on the prevailing fear or greed in the stock market.

Growth at a Reasonable Price (GARP)

Value investors focuses on finding companies that were both undervalued and are what you might call “wonderful companies” with a high potential for growth. Thus, it wasn’t enough for a company to just be undervalued. Instead, the best companies to invest in were ones that were both undervalued and wonderful companies.

To spot undervalued companies, it’s also important to ensure that the companies you are investing in are high-quality and can retain their value throughout the time that you are holding them. Phil Town likes to evaluate whether or not a business is a quality company with what he calls the 4 Ms of Investing: Meaning, Management, Moat, and Margin of Safety.

If you can check off each of these 4 Ms for a company you are considering investing in, it will be well worth your while.

Meaning

The company should have meaning to you. This is important because if it has meaning to you, you understand what it does and how it works and makes money, and will be more likely to do the research necessary to understand all elements of the business that affect its value.

Management

The company needs to have solid management. Perform a background check on the leaders in charge of guiding the company, paying close attention to the integrity and success of their prior decisions to determine if they are good, solid leaders that will take the company in the right direction.

Moat

The company should have a moat. A moat is something that separates them from the competition and, thus, protects them. If a company has patented technology, control over the market, an impenetrable brand, or a product or service customers would never switch from, it has a moat.

Margin of Safety

In order to guarantee good returns, you must buy a company at a price that gives you a margin of safety. For Rule #1 investors, 50% is the margin of safety to look for, explains Town. This provides a buffer that makes it possible to still experience gains even if problems arise. This is arguably the most important.

These 4Ms draw heavily from the rules of value investing. Both sets of rules dictate that you must buy a company below its actual value in order to make a profit. That’s the bottom line.

Even if a company is in a great position today, it needs to have future potential to triple or 10x your investment. The market cap is a reflection of what you would pay today to own a piece of the company. But the market price is not the true value of the company.

You, as a value investor, should rely on the “intrinsic value” to determine whether a company is a worthy value investment. Then, you can use the market cap to help you determine if the company is on sale and if it has the growth potential.

References:

  1. https://wp.ruleoneinvesting.com/blog/how-to-invest/value-investing/
  2. https://www.ruleoneinvesting.com/blog/financial-control/market-capitalization/

Phil Town is an investment advisor, hedge fund manager, and 3x NY Times Best-Selling Author. Phil’s goal is to help you learn how to invest and achieve financial independence.

Recession and Investing

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A recession is a period of economic contraction. Recessions are typically accompanied by falling stock markets, a rise in unemployment, a drop in income and consumer spending, and increased business failures. ~ SoFi

Liz Young, Head of Investment Strategy at SoFi, talks recession.

A recession describes a contraction in economic activity, often defined as a period of two consecutive quarters of decline in the nation’s real Gross Domestic Product (GDP) — the inflation-adjusted value of all goods and services produced in the United States. However, the National Bureau of Economic Research, which officially declares recessions, takes a broader view — including indicators like wholesale-retail sales, industrial production, employment, and real income.

Recessions tend to have a wide-ranging economic impact, affecting businesses, jobs, everyday individuals, and investment returns. But what are recessions exactly, and what long-term repercussions do they tend to have on personal financial situations? Here’s a deeper dive into these economic contractions.

It’s worth remembering some investments do better than others during recessions. Recessions are generally bad news for highly leveraged, cyclical, and speculative companies. These companies may not have the resources to withstand a rocky market.

By contrast, the companies that have traditionally survived and even outperformed during a downturn are companies with very little debt and strong cash flow. If those companies are in traditionally recession-resistant sectors, like essential consumer goods, utilities, defense contractors, and discount retailers, they may deserve closer consideration.

During a recession, it’s important to remember two key tenets that will help you stick to your investing strategy.

  1. The first is: While markets change, your financial goals don’t.
  2. The second is: Paper losses aren’t real until you cash out.

The first tenet refers to the fact that investors go into the market because they want to achieve certain financial goals. Those goals are often years or decades in the future. But as noted above, the typically shorter-term nature of a recession may not ultimately impact those longer-term financial plans. So, most investors want to avoid changing their financial goals and strategies on the fly just because the economy and financial markets are declining.

The second tenet is a caveat for the many investors who watch their investments — even their long-term ones — far too closely. While markets can decline and account balances can fall, those losses aren’t real until an investor sells their investments. If you wait, it’s possible you’ll see some of those paper losses regain their value.

So, investors should generally avoid panicking and making rash decisions to sell their investments in the face of down markets. Panicked and emotional selling may lead you into the trap of “buying high and selling low,” the opposite of what most investors are trying to do.

Stay the course and stick to your financial plan to survive a recession!

Source: https://www.sofi.com/learn/content/investing-during-a-recession/

6 Common Causes of Recessions

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“A soft landing is impossible. The economy is going to go into a recession fast. You’re going to see the economy just screech to a halt. That’s what the Fed needs to do to get inflation down.” ~ Mike Novogratz, Galaxy Digital CEO

The causes of recessions can vary greatly, according to the FinTech company Sofi. Generally speaking, recessions happen when something causes a loss of confidence among businesses and consumers. The recession that occurred in 2020 could be considered an outlier, as it was mainly sparked by an external global health event rather than internal economic causes.

The mechanics behind a typical recession work like this: consumers lose confidence and stop spending, driving down demand for goods and services. As a result, the economy shifts from growth to contraction. This can, in turn, lead to job losses, a slowdown in borrowing, and a continued decline in consumer spending.

According to SoFi, here are some common causes of recessions:

1. High Interest Rates

High interest rates make borrowing money more expensive, limiting the amount of money available to spend and invest. In the past, the Federal Reserve has raised interest rates to protect the value of the dollar or prevent the economy from overheating, which has, at times, resulted in a recession.

For example, the 1970s saw a period of stagnant growth and inflation that came to be known as “stagflation.” To fight it, the Fed raised interest rates throughout the decade, which created the recessions between 1980 and 1982.

2. Falling Housing Prices

If housing demand falls, so does the value of people’s homes. Homeowners may no longer be able to tap their house’s equity. As a result, homeowners may have less money in their pockets to spend, reducing consumption in the economy.

3. Stock Market Crash

A stock market crash occurs when a stock market index drops severely. If it falls by at least 20%, it enters what is known as a “bear market.” Stock market crashes can result in a recession since individual investors’ net worth declines, causing them to reduce spending because of a negative wealth effect. It can also cut into confidence among businesses, causing them to spend and hire less.

As stock prices drop, businesses may also face less access to capital and may produce less. They may have to lay off workers, whose ability to spend is curtailed. As this pattern continues, the economy may contract into recession.

4. Reduction in Real Wages

Real wages describe how much income an individual makes when adjusted for inflation. In other words, it represents how far consumer income can go in terms of the goods and services it can purchase.

When real wages shrink, a recession can begin. Consumers can lose confidence when they realize their income isn’t keeping up with inflation, leading to less spending and economic slowdown.

5. Bursting Bubbles

Asset bubbles are to blame for some of the most significant recessions in U.S. history, including the stock market bubble in the 1920s, the tech bubble in the 1990s, and the housing bubble in the 2000s.

An asset bubble occurs when the price of an asset, such as stock, bonds, commodities, and real estate, quickly rises without actual value in the asset to justify the rise.

As prices rise, new investors jump in, hoping to take advantage of the rapidly growing market. Yet, when the bubble bursts — for example, if demand runs out — the market can collapse, eventually leading to recession.

6. Deflation

Deflation is a widespread drop in prices, which an oversupply of goods and services can cause. This oversupply can result in consumers and businesses saving money rather than spending it. This is because consumers and businesses would rather wait to purchase goods and services that may be lower in price in the future. As demand falls and people spend less, a recession can follow due to the contraction in consumption and economic activity.

How Do Recessions Affect You?

Businesses may have fewer customers when the economy begins to slow down because consumers have less real income to spend. So they institute layoffs as a cost-cutting measure, which means unemployment rates rise.

As more people lose their jobs, they have less to spend on discretionary items, which means fewer sales and lower revenue for businesses. Individuals who can keep their jobs may choose to save their money rather than spend it, leading to less revenue for businesses.

Investors may see the value of their portfolios shrink if a recession triggers stock market volatility. Homeowners may also see a decline in their home’s equity if home values drop because of a recession.

When consumer spending declines, corporate earnings start to shrink. If a business doesn’t have enough resources to weather the storm, it may have to file for bankruptcy.

Governments and central banks will often do what they can to head off recession through monetary or fiscal stimulus to boost employment and spending. “It’s hard to not underestimate the huge impact that the response to COVID-19 had on all assets. We pumped so much liquidity into the markets it was crazy, we had never seen anything like it. We were throwing trillions of dollars around like matchsticks,” said Mike Novogratz, Galaxy Digital CEO.

Central banks, like the Federal Reserve, can provide monetary policy stimulus. The Fed can lower interest rates, which reduces the cost of borrowing. As more people borrow, there’s more money in circulation and more incentive to spend and invest.

Source: https://www.sofi.com/learn/content/what-is-a-recession/

Best Investing and Trading Advice

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  1. “History repeats because of the weakness of human nature. The greed for quick fortunes has cost the public countless millions of dollars. Every experienced stock trader knows that overtrading is his greatest weakness, but he continues to allow this weakness to be his ruin. There must be a cure for this greatest weakness in trading, and that cure is STOP LOSS ORDERS. The weakest point must be overcome and the stop loss order is the cure for overtrading.” ~ WD Gann
  2. The only true test of whether a stock is “cheap” or “high” is not its current price in relation to some former price, no matter how accustomed we may have become to that former price, but whether the company’s fundamentals are significantly more or less favorable than the current financial-community appraisal of that stock.” ~ Philip Fisher
  3. “Trading is a waiting game. You sit, you wait, and you make a lot of money all at once. Profits come in bunches. The trick when going sideways between home runs is not to lose too much in between.” ~ Michael Covel
  4. “I learned to avoid trying to catch up or double up to recoup losses. I also learned that a certain amount of loss will affect your judgment, so you have to put some time between that loss and the next trade.” ~ Richard Dennis
  5. “Trading is a psychological game. Most people think they are playing against the market, but the market doesn´t care. You’re really playing against yourself.” ~ Martin Schwarz
  6. “Value investing requires a great deal of hard work, unusually strict discipline, and a long-term investment horizon. Few are willing and able to devote sufficient time and effort to become value investors, and only a fraction of those have the proper mind-set to succeed.” ~ Seth Klarman

References:

  1. https://www.t3live.com/blog/2017/12/01/best-trading-investing-quotes/

Investing Lessons Learned

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“To maximize returns, buy stocks when everyone hates them and sell them when everyone loves them. This is easy in theory, but brutally difficult in practice.” ~ Brian Feroldi

Brian Feroldi is a financial educator and he has been saving and investing for 18+ years. From his experiences, below he shares 10 painful lessons he had to learn and sometimes relearn the hard way:

1. You don’t need leverage.

Margin and options are fun on the way up and BRUTAL on the way down. Many investors have lost more than 100% on investment before. Why? Leverage.

Buffett said it best:

2. Optimize for longevity, not upside

Compound interest is the most powerful wealth-building force that exists. But, it only works if you SURVIVE long enough for it to work.

You must avoid investing to optimize for upside potential. Instead, you should follow the barbell method to optimize for longevity.

3. High conviction DOES NOT = correct

If you convinced yourself that a certain stock could only go up. you might be right on some. On others, you may lost significant value.

Conviction is useful, but just because you think you are right doesn’t mean that you are right.

Allocate accordingly

4. Stock prices and business results (and intrinsic value) are 0% correlated in the short-term and 100% correlated in the long-term

Do not sell future mega-winners because their stocks were down (dumb).

Instead of watching the stock, instead focus on the fundamentals of the business.

5. Not having a system

Do not try to keep everything in my head, which was dumb (and impossible).

Instead, use checklists, journals, or watchlist, which are invaluable free tools.

6. Not understanding the P/E ratio

Do not pass on high P/E ratio stocks that went up big and buy low P/E ratio stocks that went down big.

Why? It’s about understanding the P/E ratio’s flaws.

Now, P/E only works in stage 4. It doesn’t work in stages 1, 2, 3 or 5

7. Panic selling and panic buying

Emotions have caused many investors to panic buy hype stocks and panic sell future mega-winners.

It’s easy to say you’ll be greedy when others are fearful, and visa-versa.

It’s hard to actually do it.

8. Study history

Human nature is remarkably consistent. The same forces that drove markets 100+ years still exist in all of us today.

There’s always a smart-sounded reason to sell and it’s important to understand that.

9. Don’t focused on what you can’t control

Do not follow the news closely, or watch for clues to predict the market.

This will be time poorly spent. Macro factors matter, but you have no control over them.

It essential you focus far more on what you can control.

10. Not changing your mind

This one is REALLY hard, but it’s necessary to do well.

Changing your mind is hard. Admitting you’re wrong is hard.

But, @JeffBezos said it best:

Learning invaluable investing lessons, especially from the mistakes of others, is an essential part of becoming a more successful long-term investor.

References:

  1. https://bookshop.org/shop/Feroldi
  2. https://www.marketwatch.com/amp/story/the-critical-money-and-investing-lessons-i-wish-my-younger-self-had-understood-11651762064
  3. http://mindset.brianferoldi.com

How to Invest for Beginners: Peter Lynch

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Investing can be for anybody, but is certainly not for everybody.

Only a handful of professional investors can compare to the legendary Peter Lynch. He rose to investing stardom in 1977 when he was appointed the fund manager of Fidelity’s Magellan Fund.

When Lynch took over, the fund had around $18 million in assets under management. After 13 years at the helm, Lynch increased the fund’s size by almost a thousand-fold.

In 1990, the Magellan Fund, and its over $14 billion in assets under management, became the biggest mutual fund in the world. At times, the fund held over 1,000 different stocks in its portfolio. Also, there was a period when it had an average annual return of 29.9%.

It doesn’t matter if you don’t know anything about investing, since there are actions a beginning investor can take to learn how to invest and how to manage their money and finances. One of the most important actions for new investors is to get started early.

Investing doesn’t have to be hard. Yet, it’s important to learn the basics of investing and what type of investments are the best depending on your financial situation and the amount of money you want to make. 

When you make it a point to save money, you are protecting yourself against life’s unforeseen difficulties. And when you invest, if you choose to do so, you will have a chance to earn much more than you would have expected to, growing your money exponentially.

Time Period

Long-term investing is one of the key concepts in Lynch’s and many of the most successful investor’s investment philosophy. Lynch argued that the value of stocks was rather easy to predict over a 10 to 20-year period, while short term predictions were pretty much useless and effectively impossible to make accurately due to market volatility.

Source: Brian Feroldi

Therefore, he strongly urged investors to always select stocks of companies that they understand, believe in and be patient to wait for them to go up over a long period of time rather than selling for profits.

According to research, if you invest a $1,000 every year on the highest day for a period of 30 years, you can expect a 10.6% annualized return. On the other hand, if you invest the same sum on the lowest day of the year, you can expect an 11.7% compounded return over the same period.

Peter Lynch also encouraged the reader to look for the tenbagger stocks.

A tenbagger is a stock that rises in value 10-fold or 1,000%. He advises against selling when the stock goes up 40% or even 100%. Instead, he urges investors to hold onto them for the long-term, despite the common trend of many investors to take profits by selling appreciated stocks.

References:

  1. https://finmasters.com/one-up-on-wall-street-review/
  2. https://www.benzinga.com/money/peter-lynch-books