Advice to a young investor
A few years ago someone asked a question on a private forum where I am a member - if you could go back in time, what would you tell the “you” that first got into investing?
I dashed off a quick reply to the question. It’s certainly not a comprehensive or well thought out list (there is some overlap), but I think it captures the basics of the (hard) lessons I’ve learned pretty well.
I’m unsure whether it was by design or luck, but the list numbers an even 10 items. I’ve listed them below, and added commentary to expand on the original point form list.
1. Don’t try to time the market. You can’t. Stay fully invested. Even through crashes.
I think it was Paul Samuelson who joked “economists have predicted nine of the last five recessions.” I think he is actually being charitable here. There is always an economist predicting a recession. There is always something to worry about. Economic collapse has been imminent since my childhood in the 1970s (this fear led to the speculative peak in gold in 1980). Sometimes you’ll even convince yourself it’s true. You might be right. But you’re probably wrong. Betting on the end of the world is a low probability strategy.
I have a history of outsmarting myself through needless worry. If I owned a quality asset, I almost always came to regret the sale. I don’t recall ever buying back at lower prices, as I had planned.
These days I’ll likely continue to hold onto all of my investments, even if I’m almost certain that a recession is on the way (kind of how I feel right now!) Because trying to time the market based on economic predictions is a losing game.
2. Don’t be afraid to pay up for quality.
We value investors don’t like paying too much for a stock, and too often that means we shy away from the best businesses. There is, of course, a reasonable limit to how much one should pay, but some businesses are actually worth it.
At what rate of return is management able to reinvest profits? How will this growth compound over time?
For the right business, paying a high price can be the intelligent thing to do. The trick is figuring out which ones are worth the price.
3. Stay away from turnaround situations. They are low probability bets that aren’t worth the headache.
Some businesses are cheap for a reason. Management will always promise that a turnaround is coming. Don’t be so quick to believe them.
4. Trust good management to get through difficult situations. They’ll figure it out better than you can.
We just lived through this with Covid. Some of the best management teams adapted to not only survive, but to thrive during a very difficult period. If you’re investing in a good business led by a strong and proven management team, give them the benefit of the doubt.
5. Keep away from angel investments and very early stage lottery tickets. A few people can do very well in this area. You’re probably not one of them.
An easy path to quick and abundant riches is rare enough that my experience tells me that it simply doesn’t work. You may as well buy lottery tickets. It’s just not worth the headache when there are always better alternatives with higher probabilities of success.
6. Don’t lower your standards. Ever.
One is always tempted to throw caution to the wind when a bull market is roaring and people are making money owning shitty companies. “I’ll just ride this shitco for a little while, and then sell to a greater fool in a few months.” Don’t do it. The music stops at unexpected times. And the absolute worst result is that your stock disappoints while the market keeps roaring. Ask me how I know this. Just don’t do it!
7. Reinvest dividends.
Compounding works wonders over time. Stay invested and keep investing.
8. Live below your means. Invest the difference.
This is all about making the most of what you have. I’ve seen people with modest salaries get amazingly rich over time. I’ve also seen people with huge incomes and no savings to speak of. Live with relative modesty and save as much as you can. Nobody is as impressed by your Rolex, Porsche, or Chanel bag as you think they are.
9. Don’t be afraid of using leverage if everything above is on point.
This point received some pushback, and definitely needs to be put in context. I’m not suggesting you should borrow to buy Bitcoin, for example. But there are times when borrowing costs are low and prospective returns are high, and when the conditions are perfect you shouldn’t be afraid to act. In the fall of 2020 I was able to lock in a borrowing rate under 2% and build a conservative portfolio yielding well over 6%. I’m not sure if we’ll ever see that again, but leverage used sparingly and intelligently can multiply your results. I would only apply this principle in conjunction with a conservative investment strategy as outlined in my book, Low Risk Rules.
10. Keep learning and adapting. The ground is always shifting under your feet.
The basic principles of intelligent investing are timeless, but how you apply them will change as the market and business environment evolves. As soon as you think you’ve got it figured out, this business will humble you. Continually question yourself and your assumptions. Be paranoid. Remain defensive. Never take anything for granted.