All investors experience successes and failures. The market doesn’t pick out certain investors. So what separates the best investors from the rest? It’s the lessons they learn along the way and how they apply them going forward.
Below are some of the key lessons I’ve learned from 30 years of investing.
“When the facts change, my opinion changes.”
This quote, often attributed to John Maynard Keynes (though it is believed he did not say it himself), is a reminder of the importance of adapting to changing circumstances. For example, in January the consensus forecast was that the Fed would cut interest rates six times this year. This forecast was based on an economic outlook that showed slowing economic growth, rising unemployment, and inflation approaching the Fed’s 2% target.
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However, the facts supporting the consensus at the beginning of the year have shifted, with economic growth, employment and inflation all significantly beating expectations, making it less likely that the Fed will cut interest rates aggressively in 2024.
Some investors were quick to adapt to the changing environment and revised their forecasts and portfolio positioning accordingly, while others who were anchored in the expectation of rate cuts were slower to adjust their expectations, which negatively impacted their portfolios.
Chasing yield is usually a bad idea
In a conference early in my career, a corporate CFO questioned the logic of risking his career for a 0.25% higher yield on his company’s short-term investments. That simple advice has stuck with me as I’ve seen investors lose money taking unnecessary risks to get a relatively small yield. In the years following the global financial crisis, the low-yield environment made it tempting to seek yield.
Higher yielding investments may have a place in a portfolio, but investors should do their homework to evaluate the feasibility of a bond’s coupon payments and principal repayments before investing. Equity investors seeking dividend yields should do similar work, evaluating the sustainability of current dividend payments (which are not guaranteed) and the valuation and growth prospects of the stock.
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Don’t blindly follow other people’s investment ideas
In the 1990s, I worked for a firm that invested in a number of privatizations of government-owned companies outside the U.S. While considering the privatization of one telecommunications company, we identified several investment red flags, including flawed corporate governance structures, questionable related-party transactions, and an unstable regulatory framework.
The analyst who proposed the investment dismissed our concerns, saying the involvement of a prominent investor was evidence of the company’s chances of privatization. But the prominent investor had more favorable deal terms, including a much lower acquisition price and preferential liquidity terms. A few years later, the prominent investor suffered much smaller losses when the telecommunications company’s stock price crashed.
While it may be tempting to invest based on cocktail party chatter, memes, and social media posts, the chances of sustainable investing success are low for investors who blindly follow others.
It’s worth thinking about what might be at stake
Most investors focus on the positives when researching a new investment idea and develop hypotheses about what they expect to happen with the stock. I’ve spoken to legendary investors who balanced the optimism inherent in their approach with “pre-analyzing” their investments before buying new stocks.
In an ex ante analysis, an investor assumes that an investment will fail at a given date in the future. Investors use ex ante analysis to identify reasons why a decision may not work out, which allows them to identify potential flaws in their investment thesis or future signals that could signal problems with their investment.
Investors who take the possibility of failure into account will be better prepared to avoid bad investments and will be able to identify sooner whether an investment is going wrong and they should sell.
Find people who have advice on how to be a better investor
The radio and bookshelves are filled with the voices of advisors debating. what Share what investors need to think about and investment success stories. Investors can learn more from those who offer investment advice. how To become a better investor. My thinking on investing has been influenced by thought leaders such as Howard Marks, Warren Buffett, Daniel Kahneman, Michael Mauboussin, Seth Klarman, and Philip Tetlock. Seeking insight into how to invest is likely to be a more productive endeavor than listening to someone’s hard story about their latest investment win.
Investing is a continuous learning process and this is by no means an exhaustive list, but I hope these lessons learned from my experience provide some practical guidance as you navigate your investing journey.
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