The Best Investment Advice You Will Ever Get

Dallas Mavericks owner Mark Cuban wrote an article on the best investment advice he's ever received. It's both great counsel, and a good reminder of how to invest. Here's my take on his advice:

1. Pay off debt
Seriously, pay off your debt. If you have any credit card or other debt on which you pay 5% or more interest, pay it off. When you decide to invest in the market and you have debt, you are implicitly saying that you believe you can earn higher returns than the amount of money you could save by paying down your debt.

Over the years, I have come across too many misguided notions about debt. (Oh, I thought your credit score gets better when you keep a balance on your card! Wait, my credit is hurt when I pay for a Vegas vacation on a new card, and then pay it down over the next year?) Pay off your debt.

2. Cash is king
With interest rates so low, many people have a problem with the idea of holding cash. They struggle to locate the highest-yielding CDs, all so they can earn a few hundredths of percent more than nothing.

Some are going further, letting themselves get lured in by companies' sporting absurdly high dividends, such as Chimera Investment (NYSE: CIM  ) and American Capital Agency (Nasdaq: AGNC  ) , without understanding the risks associated with these companies. They're just mesmerized by the yield.

Snap out of it!

By stretching for yield, you lose the flexibility that comes with holding cash. That flexibility is worth far more than the meager interest payments you would receive elsewhere, or the risk you take with the high-yielders.

Furthermore, as Berkshire Hathaway's (NYSE: BRK-A  ) (NYSE: BRK-B  ) Warren Buffett stresses, invest with a margin of safety. Buy stocks below their fair value, and you'll gain even more upside when they rise. This idea extends to your personal life as well: Live with a margin of safety by keeping a cash reserve of six months' living expenses.

Nature understands the idea of having a margin of safety. Why do you think we have two lungs and two kidneys? Living paycheck to paycheck is like living with only one of each. You can do it, but if you ever run into a problem, you're dead.

3. Cash creates transactional returns
Smart shopping will consistently earn you a better return than the market. Say you know you need to buy a new car this year for $20,000. Saving 15% on that car purchase is worth more than earning 15% on a $20,000 investment. Since your investments are taxed and your savings are not, your after-tax earnings from the investment will be significantly less than the $3,000 you saved by shopping. Just make sure you don't then go out and spend that extra $3,000 on something frivolous!

4. Keep learning
Stay curious. There's no age at which you're old enough that you don't need to learn anymore. Warren Buffett has succeeded by being a learning machine. Learn from your mistakes and others', and don't let those mistakes compound. It's almost absurd how much high quality information is now right at your fingertips. Take advantage.

Moving on 
Doing nothing is easy. Learning and making good decisions is the hard part -- the part that our Motley Fool Stock Advisor newsletter focuses on relentlessly. Learning and adapting from its past mistakes has made Stock Advisor hugely successful. If you'd like more information, click here for a free 30-day trial.

Dan Dzombak's musings and articles he finds interesting can be found on his Twitter: @DanDzombak. He does not own any of the stocks mentioned in this article.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool owns shares of Berkshire Hathaway, which is a Motley Fool Inside Value pick and a Motley Fool Stock Advisor recommendation. The Motley Fool has a disclosure policy.


Read/Post Comments (15) | Recommend This Article (31)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 22, 2010, at 4:01 PM, WmHilger1 wrote:

    How about if I have no debt, live well below my means, and have acquired nearly $1,000,000 in high yielding assets that generate significant amounts of cash to live on or reinvest? Not all of those high-yeilding assets are likely to tank all at once! In the meantime, they generate total returns in excess of 8% to 9% annually. Among them are CIM, HTS, PSEC and others, but I personally feel quite comfortable with my situation. I realize that not everyone can get themselves into my situation, but I did it over time from a base of only a few thousands of dollars when I started and I think anyone CAN do it if they remember the main idea that I mentioned of living well below my means and investing the difference at increasingly high yield rates!

  • Report this Comment On November 22, 2010, at 4:51 PM, mrwizard555 wrote:

    billinomaha, you have the world by the booty!!!

    as for the rest. little or no debt. live below what you make. save or invest the rest. it really does work.

  • Report this Comment On November 22, 2010, at 5:50 PM, FloydsBoys wrote:

    I like a nice dividend. I live or less than I make & am willing to put a few dollars on a good dividend stock.

    If the market goes up I will be able to treat my self later. If it tanks well I have been getting along with out a lot of treats so I say so what.

  • Report this Comment On November 22, 2010, at 6:50 PM, stoxmri wrote:

    I love the advice of paying down debt. I am a volunteer finance teacher at a private school in the suburbs of Chicago and routinely hand out advice like that and many other sources (Richdad/Poor Dad, NEFE student guide, The Jerry's, Rich Bernstein, Bob Farrell and many of the experts I worked with for 30+ years on the street).

    I follow my own advice for them for most of the money I invest, but I am used to superior returns and hope to continue to earn them for many more years.

    I have 75,000 shares of CIM in one of my aggressive accounts and do not consider it FOOLHARDY to continue to own it. WHY, let me give you a few reasons:

    1) My initial cost basis is not much below the stock at around 3.72 in Feb 2010 but since I watch it every day feel i will be able to get out near that price if I decide at some point to sell it.

    2) The 200 day moving average is 3.94 so I have made a mental note to sell it if it drops thru that point. I can always buy it back.

    3) I've already collected 3 dividends and CIM will go ex-div at year end so I hope to make it at least 4 which means my adjusted cost basis is now lower, I will know exactly when I get the forms from CIM.

    4) The stock trades over 40,000 shares per minute based on it's 3 month history so my position size is small relative to the trading volume of the stock, one of my cardinal rules for aggressive trading.

    5) I believe what will hurt this company the most is a long, sustained increase in interest rates which will require the Fed and our Marxist alleged President to behave very differently from their current policies. The Fed can't change yet (we're still on Ireland, haven't gotten to Portugal, Greece or the US (not that different from Greece) yet in terms of Global bailouts) and the President will not change no matter what message the stupid people who live in America send him. So no major upturn imminent. Coast is clear.

    6) Since everyone knows Obama wants to get elected again, what does he think he has to do to set that up? Note, I didn't ask what would a rational being with just a little understanding of our economy do. In his Marxist community organizer mind,he has to create chaos and blame it on the Republicans and he's got less than 2 years left to do it. Whatever form(s) of chaos he chooses will not be good for our Capital Markets or the dollar. That will not be positive for interest rates so we could go back to that "Bernacke string pushing game" for a couple of more years, during which CIM ought to earn it's diividend because of the close to zero rates. I hope I am wrong about this but what President in history responded as arrogantly and defiantly as he did after a mid term shellacking. NONE, this guy is different in a very dangerous way.

  • Report this Comment On November 22, 2010, at 8:07 PM, TMFDanDzombak wrote:

    @BillinOmaha You are a special case. My only word of advice, make sure you are diversified across industries. I'd be worried if all your high yielding assets were mortgage trusts, ie.

  • Report this Comment On November 22, 2010, at 8:07 PM, TMFDanDzombak wrote:

    @mrwizard555 agreed. Thanks

  • Report this Comment On November 22, 2010, at 8:09 PM, TMFDanDzombak wrote:

    @FloydsBoys Living below your means is where its at.

  • Report this Comment On November 22, 2010, at 8:09 PM, TMFDanDzombak wrote:

    @GermanInvestors In your blog posts, besides just posting data, you should try adding some analysis of the stocks you post.

  • Report this Comment On November 22, 2010, at 8:23 PM, TMFDanDzombak wrote:

    @stoxmri Thanks for the comment.

    On 1-4, you are still speculating though. If the price of a stock you own drops by 50% tomorrow, do you like the stock more? If not, you are speculating.

    5) sure, higher interest rates will hurt the company, as will a further narrowing of the spread between the rates cim earns from its mortgages versus the rate it can borrow at.

    6) I think you're wrong on this one. I seriously doubt "In his Marxist community organizer mind,he has to create chaos and blame it on the Republicans and he's got less than 2 years left to do it."

    If he followed that course of action it seems like the perfect way for someone else to be elected president in 2012. He and the people that got him elected have too much at stake to let him create chaos.

  • Report this Comment On November 23, 2010, at 9:42 AM, woo131 wrote:

    The best advice is not to read or act on sophomoric advice like this.

  • Report this Comment On November 23, 2010, at 2:52 PM, WmHilger1 wrote:

    To TMF Dan Dzombak; How does 32% in Financials, 24% in REITS, 27% in Utilities, and 17% in Manufacturing and Transportation (my own category designations) sound to you for diversification? My yield across all categories is 8% on Current Value and 9.3% on Investment. Total all time gain (realized and unrealized) is $450,000.

    I started in 1971 with Iowa Power and Light, which became Midwest Resources and then MidAmerican Energy until my local acquaintance, Warren Buffett, bought it out! And that was after 2 or 3 splits! I only know Warren passingly, but he has followed behind me on several stocks and bonds, to my great benefit!

  • Report this Comment On November 23, 2010, at 6:08 PM, TMFDanDzombak wrote:

    @truthisntstupid Agreed

  • Report this Comment On November 23, 2010, at 6:30 PM, TMFDanDzombak wrote:

    @BillinOmaha glad to not hear its not all in telecom or all in Mortgage REITs.

  • Report this Comment On November 28, 2010, at 10:28 AM, FutureMonkey wrote:

    Wait...what your saying is ... if I can't afford it, don't buy it?? That sounds crazy to me, but I'll give it a try.

    Reminds me of the classic steve martin SNL skit "Don't buy stuff you can't afford"

    http://www.hulu.com/watch/1389/saturday-night-live-dont-buy-...

  • Report this Comment On November 28, 2010, at 2:34 PM, TMFDanDzombak wrote:

    @FutureMonkey Thanks for posting that! Hadn't seen it.

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