Timeless quotes from great investors distil a lot of wisdom into a few words. These are some of my favourites as they have some important lessons for all investors, whether they are experienced or just starting out.
“The only investors that don’t need to diversify are those that are right 100% of the time” - Sir John Templeton
So simple but so true! If you are right 100% of the time you don’t need to diversify – spread your money and risk around different assets – but nobody is infallible and therefore diversification is a necessity to avoid the risk of capital loss that can’t be recovered from.
“Know what you own, and know why you own it” - Peter Lynch
A very straightforward piece of advice from Peter Lynch, the well-known US manager of the Fidelity Magellen fund and author of One up on Wall Street. However, some investors don’t follow it, buying things they don’t understand or without a clear rationale about why. It’s important to do your homework before making a decision and re-evaluate regularly afterwards.
“You pay a very high price in the stock market for a cheery consensus” – Warren Buffett
Warren Buffett, probably the world’s famous investor, has plenty of pearls of wisdom about paying the right price for an asset. The higher the price you pay for something, the lower the return you can expect. Sounds obvious but it’s quite easy to be sucked into what lots of other people are buying, which is usually when something is already popular and therefore expensive.
Buffett also said, “Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can’t buy what is popular and do well.” James Grant made a similar point about buying an attractive price before popularity drives up price: “Successful investing is about having other people agree with you … later”.
“Price is a creature of the market’s mood. In booms, it is set by the greediest buyer; in busts by the most fearful seller” – Benjamin Graham
Ben Graham was the father of ‘value’ investing and described the emotional and sometimes irrational behaviour of investors through the moods of ‘Mr Market’, who is at times a wild optimist and at times an utter pessimist. Having a balanced view of opportunities and risks tends to work best to stay the course and not be panicked out of investments at a poor time, nor chase investments too high as they rise.
“What is ‘risky’ to short-term investors may not be ‘risky’ to long-term investors” - Unknown
The most effective thing you do to increase your chances of investment success is to extend your time horizon.
Something like 70-80% spread betters lose money because they are betting on short term movements and eventually come unstuck. The odds of losing money investing in the stock market for a period of ten years is is in the region 10%, at least in respect of academic studies on the US market. This is based on the past, and the future may be different. Yet the principle remains that the longer you invest for the longer you can compound returns from growth and income, and the more likely that you will have a good result – as Buffett put it, “In order to succeed you have to survive”.
There are two main things to bear in mind when assessing your own risk tolerance: Financial circumstances and time horizon. The less money you have and the shorter time you have the less able you are to take on risk. Those with little or no savings or, even worse, significant expensive debt should not be looking to invest. Their capacity for loss is essentially zero. But what do we mean by risk in the context of investing? Find out more what is investment risk.
“Success in investing doesn't correlate with IQ” – Warren Buffett
This is a really important point. It’s not how clever you are that makes you a good investor. Buffett continues, “Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people in trouble investing.”
Lots of intelligent investors lose fortunes through taking on too much risk – often through excessive debt – because they are impulsive or overconfident. Keeping a lid on this is more important that being smart, though clearly intelligence helps in the process of learning. Provided amateurs spend time learning some basics, investing is one of the rare pursuits where they can do as well as professionals, something that just wouldn’t happen in athletics or science for example!
“If you don't feel comfortable owning a stock for 10 years, you shouldn't own it for 10 minutes.” – Warren Buffett
Another one from ‘The Sage of Omaha’, cautioning investors to only buy investments they have confidence in and would be happy to hold for an extended period. While short term movements are hard to predict, time tends to be on the side of the long-term investor who has bought a great company at a good price. “Our favourite holding period is forever” is another of his famous quotes along similar lines – there is no need for an investor to sell so long as they still have confidence in the long-term potential.
“Everyone has a plan, until they get punched in the mouth” – Mike Tyson
Not a quote from a famous investor, but one I like, nonetheless. Sometimes your plan won’t work, and it certainly won’t work perfectly all the time. It’s a good idea to make it as adaptable as possible and expect the unexpected when it comes to markets. This is particularly relevant for those in, or approaching, retirement as one or two mistakes at the wrong time can have a particularly detrimental effect.
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