Don’t tell Wall Street I told you this, but it’s true: investing isn’t the way to “get rich quick.”
I know, it’s tempting to put down your money on penny stocks because they’re sure to be a winner this time, and you’ll finally be able to pay off those student loans.
It’s hard not to get excited when you’re dealt a good stock tip. There’s this rush of adrenaline, this feeling that you might hit it big…
I hate to break it to you, but you aren’t investing. You’re gambling.
“Never invest in a business you can’t understand.”
Warren Buffett is arguably the most famous and successful investor of the 20th century. With a net worth over $60 billion, he seems to understand this investing thing pretty well.
If you don’t understand the business you are investing in, it’s foolish to trust that company with your money.
You need to be able to understand not just the industry and the products and the business plan, but also the financials of the company. Is it well managed? Have they been reliable in recent years, or has their performance been volatile? Do they adjust with changing markets?
This takes a lot of effort, research, and study. It’s not for everyone — but it will make the difference between a gamble and a wise investment.
“Rule #1: Never lose money. Rule #2: Never forget Rule #1.”
After reading this Buffett quote, some people get incredulous. It’s impossible to never lose money in the stock market. No one knows what will happen.
While it’s true that no one knows what the future holds, it’s possible to approach investing with the goal of never losing money. This probably means taking a longer term view, and not jumping into young unproven companies and trying to time the market tops. Besides, if you’re only investing in companies you understand, you won’t ever make a rash investing decision anyways.
Buffett also advises, “Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”
That’s definitely a long term approach, and that’s some serious confidence in a company. That means you believe that company is solid and will continue to grow and thrive in the near future, regardless of stock price.
“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” If you want to make sure you don’t lose money when you invest, you have to do your homework to pick the best companies. No bandwagon investing. Which leads us to our next quote…
“Only when you combine sound intellect with emotional discipline do you get rational behavior.”
You have to set reasonable expectations. Use your intellect to do your homework, and exercise discipline when making an investment. You must be patient, and you must have confidence in your research so you don’t worry about bear markets or go chasing after bulls.
Many of us have seen advertisements for investing “gurus” who promise annual returns of 100% or more on your investment. While that sounds nice, there’s usually a part of our brain that is skeptical.
As it turns out, there’s good reason for our brain to be skeptical: that’s an outrageous return!
Warren Buffett has averaged a compound annual return of about 20% over his investing career. If the best investor gets around 20% a year, do you really think it’s wise to hold out for a magical return that’s five times greater?
“We will only do with your money what we would do with our own.”
That should be the mantra of any investment firm that you entrust your money to. If you’ve decided you’d rather let someone else do research for you, then you need to do your due diligence to make sure that that firm/company/newsletter is not only trustworthy, but that they are literally putting their money where their mouth is. Namely, the advisors invest in the same vehicles they recommend for you.
Many financial advisors are inexperienced, or they are part of a company that tells them which funds to recommend to everyone. That is a bad combination if you want to have any hope of following Rule #1. Investing is not a “one size fits all” game.
Make sure that you find a financial newsletter or advisor that adheres to these same principles. That can make a huge difference over the course of your lifetime. For example, if you invested $10,000 in the S&P in 1966, today you would have $140,000. But if you invested that same $10,000 with Warren Buffett, today you would be sitting on $300 million.
There’s no need to gamble with your money. A little patience and discipline will serve you well over time. But remember, investing will not help you to “get rich quick” either.